UNIFICATION AND THE POLICY PREDICAMENT IN GERMANY

We argue that wages have increased so far ahead of labour productivity in east Germany as to produce a problem that will continue to hound G erman policy-makers for the next two decades. Despite rapid rates of c apital accumulation (around 9%) and growth (around 5%) in east Germany over the coming 10 years, our estimates show that even if wage catch- up decelerates greatly, as long as it continues, the rate of unemploym ent in the east will still be twice as high as in the west in another 10 years. Alternatively, if wage discipline forces the eastern unemplo yment rate to come down to the western level, wage differentials will widen substantially over these next 10 years, Thus serious problems lo om ahead.