Migration, Wages, and Parental Background: Obstacles to Entrepreneurship and Growth in East Germany

Kuehn, Zoe (2012): Migration, Wages, and Parental Background: Obstacles to Entrepreneurship and Growth in East Germany.

Abstract

East Germany's unemployment rate still doubles that of West Germany and for the last decade its economic growth has been below that of other transition countries. Policy makers often point to the lack of entrepreneurship as one of East Germany's main problems. This paper addresses the question of how East Germany's integration into an established economy, West Germany, may have hindered a fruitful development of entrepreneurship and how this may have affected economic growth. I build a model economy that places Lucas' (1978) span-of-control model into an overlapping-generations framework. Following Hassler and Rodríguez Mora (2000) managerial knowhow is defined as a combination of two factors, innate talent and entrepreneurial parental background. Furthermore, growth depends only on the innate talent of entrepreneurs. In East Germany, the lack of entrepreneurial parental background makes innate talent the decisive factor in occupational choice and more talented entrepreneurs should contribute to high growth rates. However, three key aspects of its integration into West Germany inhibit this mechanism: migration possibilities to West Germany, the way East German wages were regulated upon reunification and the importance of parental background for entrepreneurship in West Germany. Counterfactual experiments show that eliminating any of these three aspects leads to more entrepreneurs, less unemployment, and higher economic growth in East Germany.

• Item Type: MPRA Paper
• Language: English
• Keywords: Entrepreneurship, Allocation of Talent, Social Mobility, Transition
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; F - International Economics > F1 - Trade > F15 - Economic Integration; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply

References

Akerlof, George A, Andrew K. Rose, Janet L. Yellen, Helga Hessenius, Rudiger Dornbusch, and Manuel Guitian (1991): "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, 1, 1-105.

Alesina, Alberto and Nicola Fuchs-Schuendeln (2007): "Good Bye Lenin (Or Not)?, The Effect of Communism on People's Preferences," The American Economic Review, 97 (4), 1507-1528.

Alesina, Alberto, Stephan Danninger, and Massimo Rostagno (2001): "Redistribution Through Public Employment: The Case of Italy," IMF Staff Papers No. 48 (3).

Arenius, Pia and Maria Minniti (2005): "Perceptual Variables and Nascent Entrepreneurship," Small Business Economics, 24, 233-257.

Arum, Richard and Walter Mueller (2004): "The Reemergence of Self-Employment: Comparative Findings and Empirical Propositions," in The Reemergence of Self-Employment: A Comparative Study of Self-Employment Dynamics and Social Inequality edited by Richard Arum and Walter Mueller, Princeton, pg.426-454.

Bajona, Claustre and Luis Locay (2009): "Entrepreneurship and productivity: The slow growth of the planned economies," Review of Economic Dynamics, 12 (3), 505-522.

Bonin, Holger and Klaus F. Zimmermann (2000): "The Post-Unification German Labor Market," IZA Discussion Paper No. 185.

Breen, Richard and Ruud Luijkx (2004): "Social Mobility in Europe between 1970 and 2000," in Social Mobility in Europe, edited by Richard Breen, Oxford University Press.

Brueckner, Herbert and Truebswetter, Parvati (2007): "Do the best go west? An analysis of the self-selection of employed East-West migrants in Germany," Empirica, 34, 371-395.

Bundesagentur fuer Arbeit (2008): Statistik der Bundesagentur fuer Arbeit

Bundesagentur fuer Arbeit (2007): Statistik der Bundesagentur fuer Arbeit, Arbeitsmarkt in Zahlen, Arbeitslose, Nuernberg, August 2007.

Bundesagentur fuer Arbeit (2006): "Arbeitsmarkt 2006", Amtliche Nachrichten der Bundesagentur fuer Arbeit, 55. Jahrgang, Sondernummer 1.

Bundesministerium fuer Arbeit und Soziales (2008): Entwicklung der Regelsaetze.

Burchardi H. Konrad and Tarek A. Hassan (2010): "The Economic Impact of Social Ties: Evidence from German Reunification," Chicago Booth Research Paper No. 10-27.

Burda, Michael C. (1993): "The determinants of East-West German migration:Some first results," European Economic Review, 37 (2-3), 452-461.

Burda, Michael C. and Jennifer Hunt (2001): "From Reunification to Economic Integration: Productivity and the Labor Market in Eastern Germany," Brookings Papers on Economic Activity, 2, 1-71.

Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo (1995): "Capital Utilization and Returns to Scale," NBER Working Paper No. 5125.

Burnstein, Ariel T. and Alexander Monge-Naranjo (2009): "Foreign Know- How, Firm Control, and the Income of Developing Countries," Quarterly Journal of Economics, 124 (1), 197-231.

Canova, Fabio and Morten O. Ravn (2000): "The Macroeconomic Effects of German Unification: Real Adjustments and the Welfare State," Review of Economic Dynamics, 3 (3), 423-460.

Caselli, Fransesco and Nicola Gennaioli (2012): "Dynastic Management," Economic Inquiry, forthcomming.

Chang, Yongsung (2000): "Wages, business cycles, and comparative advantage," Journal of Monetary Economics, 46 (1), 143-171.

CIA (2008): "The World Factbook," Central Intelligence Agency.

Deutsche Bundesbank (2001): Monthly Report July 2001.

Diewald, Martin, Heike Solga and Anne Goedicke (2006): "Old Assets, New Liabilities? How Did Individual Characteristics Contribute to Labor Market Success or Failure After 1989?," in After the Fall of the Wall. Life Courses in the Transformation of East Germany, edited by Martin Diewald, Anne Goedicke, and Karl Ulrich Mayer, Stanford, pp.65-88.

DIW (1995): Wochenbericht 50/95, DIW (Deutsches Institut fuer Wirtschaftsforschung), Berlin.

Dunn, Thomas and Douglas Holtz-Eakin (1996): "Financial Capital, Human Capital and the Transition to Self-Employment: Evidence from Intergenerational Links," NBER Working Paper No. 5622.

Earle John S. and Zuzana Sakova (2000): "Business start-ups or disguised unemployment? Evidence on the character of self-employment from transition economies," Labour Economics, 7, 575-601.

Entrepreneurs International (Compendia) (2002): COMPENDIA 2000.2: a harmonized data set of business ownership rates in 23 OECD countries.

Erikson, Robert and John H. Goldthorpe (1993): The Constant Flux. A Study of Class Mobility in Industrial Societies. Claredon Press Oxford.

Eurostat (2005): Structural Business Statistics (Industry, Construction, Trade and Services). Annual enterprise statistics broken down by size classes.

Fuchs-Schuendeln, Nicola (2009): "On Preferences for Being Self-Employed," Journal of Economic Behavior and Organization, 71 (2), 162-171.

Fuchs-Schuendeln, Nicola and Matthias Schuendeln (2009): "Who stays,who goes, who returns" Economics of Transition, 17 (4), 703-738.

Fuchs-Schuendeln, Nicola and Rima Izem (2007): "Explaining the Low Labor Productivity in East Germany-A Spatial Analysis," Kiel Working Papers No. 1307.

Galor, Oded and Daniel Tsiddon (1997): "Technological Progress, Mobility, and Economic Growth," The American Economic Review, 87 (3), 363-382.

Geissler, Rainer (2006): Die Sozialstruktur Deutschlands. Zur gesellschaftlichen Entwicklung mit einer Bilanz zur Vereiningung. Wiesbaden.

Gernandt, Johannes and Friedhelm Pfeiffer (2007): "Rising Wage Inequality in Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 227 (4), 358-380.

Glismann, Hans H. and Klaus Schrader (2002): "Die Reform der deutschen Arbeitslosenversicherung vor dem Hintergrund ihrer Geschichte," Kieler Arbeitspapier Nr. 1112, Kiel Institute for the World Economy.

Goldberger, Arthur S. (1989): "Economic and Mechanical Models of Intergenerational Transmission," The American Economic Review, 79 (3), 504-513.

Guner, Nezih, Gustavo Ventura and Yi Xu (2008) "Macroeconomic implications of size-dependent policies," Review of Economic Dynamics, 11 (4), 721-744.

Hassler, John and Jose V. Rodríguez Mora (2000): "Intelligence, Social Mobility and Growth," The American Economic Review, 90 (4), 888-908.

Heiland, Frank (2000): "Trends in East-West German Migration from 1989 to 2002," Demographic Research, 11 (7), 174-193.

Heston, Alan Robert Summers and Bettina Aten (2011): Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, March 2011.

Hsieh, Chang-Tai and Pete J. Klenow (2009): "Misallocation and Manufacturing TFP in China and India," Quarterly Journal of Economics , 124 (4), 1403-1448.

Hunt, Jennifer (2008): "The Economics of German Reunification," in The New Palgrave Dictionary of Economics, Second Edition, Palgrave Macmillan, edited by Steven N. Durlauf and Lawrence E. Blume.

Hunt, Jennifer (2006): "Staunching Emigration from East Germany: Age and Determinants of Migration," Journal of the European Economic Association, 4 (5), 1014-1037.

Institut fuer Arbeitsmarkt-und Berufsforschung (IAB) (2008): "Neu gegruendete Betriebe sind seltener tarifgebunden," in IAB Kurzbericht 16/2008.

Klein, Sabine B. (2000): "Familiy Businesses in Germany. Significance and Structure," Family Business Review, 13 (3), 157-181.

Kuznets, Simon (1966): Modern Economic Growth: Rate, Structure, and Spread. Yale University Press, New Haven and London.

Krueger, Alan B. and Joern-Steven Pischke (1995): "A Comparative Analysis of East and West German Labor Markets Before and After Unification," in Differences and Changes in Wage Structure edited by Richard B. Freeman and Lawrence F. Katz, Chicago pp. 405-446.

Lentz, Bernhard F. and David N. Laband (1990): "Entrepreneurial Success and Occupational Inheritance among Proprietors," The Canadian Journal of Economics, 23 (3), 563-579.

Lohmann, Henning and Silvia Luber (2004): "Trends in Self-Employment in Germany: Different Types, Different Developments?," in The Reemergence of Self-Employment: A Comparative Study of Self-Employment Dynamics and Social In- equality edited by Richard Arum and Walter Mueller, Princeton, pg.36-74.

Lucas, Robert E. Jr. (1978): "On the Size Distribution of Business Firms," The Bell Journal of Economics, 9 (2), 508-523.

Morck, Randall K., David A. Stangeland and Bernard Yeung (1998): "Inherited Wealth, Corporate Control, and Economic Growth. The Canadian Disease?," NBER Working Papers No. 6814.

Mueller, P. (2006): "Entrepreneurship in the Region: Breeding Ground for Nascent Entrepreneurs?," Small Business Economics 27, 41-58.

Mueller, Walter and Reinhard Pollak (2004): "Social Mobility in West Germany: The Long Arms of History Discovered?," in Social Mobility in Europe, edited by Richard Breen, Oxford University Press

Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny (1991): "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, 106 (2), 503-530.

OECD (2007a): Strengthening entrepreneurship and local economic development in East Germany, Centre for Entrepreneurship, SMEs and Local Development, Organisation for Economic Co-Operation and Development, Paris.

OECD(2007b): OECD Education at a Glance 2007, OECD Indicators, Organisation for Economic Co-Operation and Development, Paris.

OECD (2006): Revenue Statistics 1965-2005, Organisation for Economic Co-Operation and Development, Paris.

OECD (1992): OECD Employment Outlook 1992, Organisation for Economic Co-Operation and Development, Paris.

Olson, Mancur (1982): The Rise and Decline of Nations. Yale University Press, New Haven and London.

Pica, Giovanni and Jose V. Rodríguez Mora (2007): "Who's Afraid of a Globalized World? Foreign Direct Investments, Local Knowledge and Allocation of Talents," CSEF Working Paper No. 184, Centre for Studies in Economics and Finance, University of Salerno.

Pistrui David, Harold P. Welsh, Oliver Wintermantel, Jianwen Liao, and H.J. Pohl (2000): "Entrepreneurial Orientation and Familiy Forces in the New Germany: Similarities and Differences Between East and West German Entrepreneurs," Familiy Business Review, 13(3), 251-264.

Ragnitz, Joachim (2007): "Explaining the East German Productiviy Gap- The Role of Human capital," Kiel Working Papers 1310, Kiel Institute for the World Economy.

Ragnitz, Joachim (2002): "Wirtschaftsfoerderung in Ostdeutschland: Wirkungen, Nebenwirkungen und ein Reformvorschlag," IWH Diskussionspapier Nr. 167, Institut fuer Wirtschaftsforschung Halle.

Restuccia, Diego and Richard Rogerson (2008): "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, 11 (4), 707-720.

Roland, Gérard (2000): Transition and Economics Politics, Markets, and Firms. Massachusetts Institute of Technology.

Sachverstaendigenrat (2007/08): "Abgrenzung der verdeckten Arbeitslosigkeit (Anhang IV C)," Auszug aus dem Jahresgutachten 2007/08 Sachverstaendigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.

Sinn, Hans-Werner (2002): "Germany's Economic Unification An Assesment After Ten Years," Review of International Economics, 10 (1), 113-28.

Snower, Dennis J. and Christian Merkl (2006): "The Caring Hand that Cripples: The East German Labor Market after Reunification," The American Economic Review, 96 (2), 375-382.

Solon, Gary (2002): "Cross-Country Differences in Intergenerational Earnings Mobility," Journal of Economic Perspectives, 16 (3), 59-66.

Solga, Heike (2006): "The Rise of Meritocracy? Class Mobility in East Germany Before and After 1989," in After the Fall of the Wall. Life Courses in the Transformation of East Germany, edited by Martin Diewald, Anne Goedicke and Karl Ulrich Mayer, Stanford, pg.140-169.

Statistisches Aemter der Laender (2011): Volkswirtschaftliche Gesamtrechunungen der Laender, Bruttoinlandsprodukt, Bruttowertschoepfung in den Laendern und Ost-West-Grossraumregionen Deutschlands 1991 bis 2010, Reihe 1, Band 1, Statistisches Landesamt Baden-Wuerttemberg Stuttgart.

Statistische Aemter des Bundes und der Laender (2007): Wanderungsstatistik, Zu- und Fortzuege nach Altersgruppen (ueber Gemeindegrenzen).

Statistisches Bundesamt (2011): https : ==www:destatis:de=DE=ZahlenFakten=GesamtwirtschaftUmwelt=V erdiensteArbeitskosten=ArbeitskostenLohnnebenkosten= Arbeitskosten=AktuellArbeitskostenerhebung:html

Statistisches Bundesamt (2008): Unternehmensregister Unternehmen nach zusammengefassten Rechtsformen im Berichtsjahr 2005 Statistisches Bundesamt Deutschland.

Statistisches Bundesamt (2006): Volkswirtschaftliche Gesamtrechunungen, Inlandsproduktsberechnug, Revidierte Jahresergebnisse 1970 bis 1991, Fachserie 18, Reihe S.29, Wiesbaden.

The Economist (1996): "Divison of labour", Barbara Beck, London Nov. 9 1996 Vol. 341 Iss. 7991 p- Survey 10.

Uhlig, Harald (2006): "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," The American Economic Review, 96 (2), 383-387.

United Nations Statistics Division (2010).

United Nations (2002): "International Migration from Countries with Economies in Transition : 1980-1999," Population Division, Department of Economic and Social Affairs, United Nations Secretariat.

World Bank (2009): "Doing Business 2009. Comparing Regulation in 181 Economies," The International Bank for Reconstruction and Development, The World Bank, Washington, D.C.

Wurzel, Eckhard (2001): "The Economic Integration of Germany's New Laender," Economics Department Working Paper, No. 307, OECD, Organisation for Economic Co-Operation and Development, Paris.