Germany: East and West moving closer together

30 years after reunification

The coming down of the Berlin Wall on 9 November 1989, started the process towards German reunification. The following year, the German Democratic Republic (GDR) voted to dissolve itself and joined the Federal Republic formally on 3 October 1990. Berlin became the capital of the united country and the number of states (Länder) increased from 10 to 16. The 30th anniversary of the country’s reunification is a good occasion to analyse the convergence between the new and old Länder^[1].

Thirty years is a long period. However, looking at disposable income levels, it is still as if an invisible curtain is dividing the western and eastern part of the country (Chart 1). In the early 1990s, economists wondered how long it would take for West and East Germany to converge. Already in 1991 in an op-ed article in The Wall Street Journal, Barro warned against too much optimism^[2]. He argued that convergence usually takes a long time. In the case of the US, about 2% of the gap between poor and rich states vanishes each year^[3]. It implies that the “half-life” – the expected time that is takes to eliminate half of the initial spread – is about 35 years. With respect to levels of labour productivity, the Barro estimate looks quite accurate starting from 1995 (Chart 2).

Lower productivity levels in the East

The main reason for these differences is that wages and productivity in the former German Democratic Republic (GDR) are still well below the levels in the West. Between 1991 and 1996, the productivity gap quickly narrowed (Chart 2). However, after 1996, the convergence progress slowed considerably and by 2018, productivity in the eastern part was only 80% of that in the west. In terms of wages, a similar development has been observed.

Looking at sector level, some interesting observations can be made (Chart 3). In all sectors, hourly wages in the East are converging slowly to levels in the West. The public sector has clearly played an important role. Since 2014, the gap has been less than 10%. Since 2019, the special pay scales for the eastern part of the country have been abolished. Nevertheless, income differences may still persist, as the composition of grades and ranks varies from region to region. For this reason, average hourly public sector wages are highest in the Federal capital Berlin (In 2017, EUR 33 against EUR 31 in the western part and EUR 29 in the east).

The highest wage gap is in the manufacturing sector. In this sector, the average wages in the East are around 60% of those in the West and hardly any convergence has been observed since 2000. The origin for the substantial gap is in the painful industrial restructuring process following the reunification. The state-owned companies in the former GDR were not able to compete with the firms in the western part. The government charged the Treuhandanstalt with the restructuring and the privatisation of the sector. The new owners were typically companies from western Germany. Companies that did not find a buyer had to be closed down. In the early 1990s, the share of the manufacturing sector in GDP in the new Länder shrunk from close to 35% in the former GDR to just above 10%.

Headquarters and research sites that employ high-skilled people have remained in the West. This has acted as a magnet for young people in the East. In addition, the relatively low wages in the new Länder have failed to attract new businesses. Manufacturers that look for cheap production sites prefer to set up business in the surrounding transition economies such as the Czech Republic, Hungary, Poland and Slovakia, which have substantially lower wages.

Only in the very small agriculture sector - less than 1% of total hours worked in the economy - wages in the East have been even slightly higher since 2008. It is also the sector with lowest hourly wage rate: EUR 17 against EUR 32 for the whole economy.

Internal migration is a major driver for convergence at high social costs

In the former GDR, unemployment was virtually unknown. However, shortly after reunification, as firms had to be closed down, it rapidly increased in the new Länder and peaked at 27% in 2004, around 16 percentage points higher than in the western part of the country.

In recent years, the situation has considerably improved. Unemployment in the eastern part is still higher than in the west (see chart 4), but the differences have considerably diminished. In 2019, according to the national definition, the unemployment rate in the West amounted to 5.4% against 6.2% in the East. In both regions, about one third of the unemployed was longer than a year without a job.

Migration flows from the East to the West, driven by disparities in living standards and wages largely contributed to this convergence. Between 1990 and 2016, the new Länder lost 1.2 million people, as 3.6 million people moved from the East to the West and only 2.4 million people moved in the opposite direction (Chart 5). As most leavers were in the working-age population, the decrease in the age bracket between 15 and 65 years was even more impressive. Between 1992 and 2016, the new Länder lost 2.2 million people in this group, i.e. about a quarter of its working-age population.

This could not remain without consequences. Before the reunification, the population in the eastern Länder was on average much younger than that in the West due to the pro-natalist policies of the communist regime that actively encouraged childbearing at an early age. Meanwhile, in the Federal Republic, people married later and fertility fell even below the replacement rate. In 1991, the median age in the eastern Länder ranged between 33.1 in Mecklenburg-Vorpommern to 37.4 in Sachsen. In the old Länder, it was in the range of 36.8 in Baden Württemberg to 40.9 in Hamburg. As the young left and the elderly stayed behind, the population in the East has been rapidly getting older. Three decades later, the new Länder have the oldest populations (Chart 6). In Brandenburg and Sachsen Anhalt, the median age is even above 50. By contrast, the youngest populations can be found in the city states Hamburg (41), Berlin (41.4) and Bremen (43.9) and the southern Länder Baden-Württemberg (44.4) and Bayern (44.9).

As a result, the social infrastructure changed in the East. Schools and libraries had to be closed and public transport services became less frequent. These factors not only discouraged people to settle in the East, but also created resentment, which manifested itself in the rise of political extremism^[4].

Since 2014, migrations flows between the two regions have been about equal at close to 90 thousand people. This is partly related to the better employment prospects in the new Länder. A large proportion of people moving to the East are originally from this region. They are called Rückwanderer. Among them are many pensioners who after their working life in the West, moved back to their region of origin, attracted by the lower costs of living. Local authorities have discovered that Rückwanderer could be a valuable asset for their region by having useful skills acquired in the West. The Chamber of Commerce of Saxony has set up a website to assist Rückwanderer “Sachse komm zurück”.

East and West may meet

Thirty years after reunification, the differences between the old and new Länder have considerably narrowed. Income differences in some sectors have almost completely disappeared and unemployment rates are approaching each other. The welfare level of some wealthier regions in the eastern part is close to that of the poorer regions in the west.

Since a couple of years, migration flows between West and East Germany are balancing each other out. Today, more people from Bavaria are moving to Saxony than the other way round.

In addition, some cities in the eastern part of Germany have become very dynamic. Leipzig is for instance the fastest growing city in the country.

Despite the few bright spots, some regions in the new Länder are still rapidly ageing as young people move out while the elderly stay. However, this phenomenon is not anymore restricted to the East. In the West, too, the gap is growing between areas of urban sprawl and their peripheries, between areas that are up-and-coming and those that are in decline. To quote Rudyard Kypling “East is East and West is West”, but this time – at least demographically –the twain may meet.

Raymond Van der Putten

^[1] Given its special status, we have excluded the federal capital Berlin from our comparisons.

^[2] Barro, Robert J. (1991, May 3rd), "Eastern Germany’s long haul", in The Wall Street Journal.

^[3] Larry Summers has dubbed this the "iron law of convergence".

^[4] At the 2019 European election, the AfD (extreme right) and Die Linke (extreme left)
obtained 21.1% and 13.4% of the vote in the new Länder (including Berlin) against 8.8% and 3.8% in the old Länder.