European Economy. Economic Papers. Germany's growth performance in the 1990's

Figure 3.4:
German re-unification and External Competitiveness
a) Labour productivity (DEM)
70000
75000
80000
85000
90000
95000
100000
1981
1986
1991
1996
D (WD up to 1990)
WD
b) Compensation per employee
35000
40000
45000
50000
55000
60000
65000
70000
1981
1984
1987
1990
1993
1996
D (WD up to 1990)
WD
c) Unit labour costs (1990 = 100)
85
90
95
100
105
110
115
120
125
1981
1984
1987
1990
1993
1996
D (WD up to 1990)
WD
d) Real effective exchange rate vis-
à-vis EU-11 (ULCE, 1990=100)
95
100
105
110
115
120
1981
1984
1987
1990
1993
1996
D (WD up to 1990)
WD (art.)
The sharp increase in
unit labour costs
in Germany from 1991 onwards indicates that the fall in
average labour productivity was not fully matched by the decline in compensation per employee
(Figure 3.4c). Between 1990 and 1993 average German unit labour costs rose by more than
17%. The extraordinary increase in unit labour costs came mainly from East Germany, where
labour costs rose sharply from a level that was already well above that of West Germany. In
addition, the costs of re-unification weighed also on West German labour costs as direct taxes
(e.g. "solidarity surcharge") and social security contribution rates went up in response to East
German financing needs. However, the amount by which average German unit labour costs
exceeded those in West Germany indicates the extraordinary huge mismatch in the five new
Länder and East Berlin. Moreover, one has to take into account that the observed unit labour
costs in East Germany do not fully reflect the full pressure of wage increases in the East, as they
only partly reflect genuine productivity improvements. Unit labour costs were dampened,
because output per capita in the East rose when a very large number of firms with low
productivity were simply pushed out of the market, leaving only the most productive companies
as survivors.

---

The 
real effective exchange rate
of the DEM vis-à-vis the other Euro-area economies (based on
unit labour costs) displays a sharp increase following re-unification (Figure 3.4.d).
39
Although
this trend has been reverted since the mid-1990s, the level of the real effective exchange rate has
remained high. Clearly, therefore, indicators that are based on a late chaining point of West
German and pan-German data risk to underestimate the impact of re-unification on external
competitiveness.