1987 Reports

Institutional Aspects of High Unemployment in the Federal Republic of Germany

Burda, Michael C.; Sachs, Jeffrey D.

The sustained rise in German unemployment since 1973 poses a problem of critical importance for the world economy. Fewer than two decades ago, Germany boasted an average unemployment rate of under 1% and imported labor to relieve chronic labor shortages. By the mid-1980s, unemployment had risen to over 8 percent of the labor force. This paper investigates some of the reasons for the secular rise in unemployment. We find that while deficient aggregate demand can probably explain some of the current joblessness, the secular rise in unemployment has consisted primarily of an increase in the equilibrium rate of unemployment. We also find little evidence that this increase is due to changes in frictional unemployment. Rather, after reviewing institutional details of the labor market in Germany, we identify various impediments to the kinds of structural adjustments that have operated to maintain a fairly constant equilibrium rate of unemployment in the United States.