Unit labour costs still higher in east than in west Germany

Conclusion The rapid wage growth in east Germany during the early years of German unification are a millstone around the neck of medium-term economic development in the new federal states. Because labour costs have raced ahead of productivity, unit labour costs have risen to a level substantially higher than that prevailing in the old federal states: there has been no improvement in the relationship between east and west German unit labour costs in recent years. Comparatively high wages at low productivity have led to an unfavourable profitability situation for many east German firms, which, in turn, has reduced investmen and slowed productivity growth. If firms in the new federal states are to break out of this vicious circle “it is essential that the level of collectively agreed wages does not rise for a number of years. Productivity growth would then create the scope for an improvement in profitability, which, in turn, is a necessary precondition for investment and the creation of competitive jobs… Only if a fundamental correction towards a relation (between labour costs and productivity) corresponding to that in west Germany is realised in east Germany can a self-sustained growth process be expected.”⁷ Yet in 1997 there is again no chance of a change of course of this nature.