U n e m p l o y m e n t i n G e r m a n y , as elsewhere i n E u r o p e , has increased dramatically between the early 1970s and the late 1980s. I n the 1970s, the mainstream view blamed excessive wage pressure. T h i s view made heavy use of the real wage gap measures w h i c h indicated that real wages were r u n n i n g ahead of (trend) productivity. I n the 1980s, when unemployment rose still higher while the real wage gap declined rapidly, the mainstream view was that excessive wage pressure could no longer be b l a m e d [see G o r d o n , 1988; Paque, 1990]. O u r analysis i n this paper has led us to two b r o a d conclusions: First, the real wage gap, as usually measured, is of little use as a n indicator of excessive wage pressure. Second, whereas the mainstream view of the 1970s nevertheless seems to be correct, the mainstream view of the 1980s is more dubious.
T h e basic argument u n d e r l y i n g o u r first c o n c l u s i o n is very simple:
Since the real wage is a n endogenous variable of the macroeconomic system, j o i n t l y determined by wage-setting a n d l a b o u r d e m a n d be-haviour, it cannot be expected to be related to employment i n any stable way. D e p e n d i n g o n whether exogenous shocks affect the l a b o u r market t h r o u g h the wage-setting schedule o r through the l a b o u r de-m a n d schedule, the real wage a n d the unede-mployde-ment rate w i l l de-move
together or i n opposite directions. O u r explanation of why they m o v e d in opposite directions after the mid-1970s points to the role of the slowing capital formation.
T h e n o t i o n that E u r o p e a n unemployment m a y be related to insuf-ficient investment is not uncontroversial. It is dismissed out of h a n d by G o r d o n [1988, p. 278] w h o cited the 87.6 per cent increase i n Europe's capital-labour ratio from 1972 to 1986 as evidence of the contrary (for G e r m a n y , the figure is 78.6 per cent). However, once the capital-labour ratio is adjusted for its trend, w h i c h w o u l d n o r m a l l y be ex-pected to be increasing i n a g r o w i n g economy, we find a rather steep decline after 1975 (Figure 4 a, above). If the elasticity of substitution between capital a n d l a b o u r lies below unity, as most estimates i n c l u d -ing our o w n i m p l y , any reduction of the (trend-adjusted) capital-labour ratio must lower the wage share i n n a t i o n a l income a n d the (adjusted) real wage gap, w h i c h is what actually happened.
T h e pace of capital accumulation also plays a significant role i n the theoretical framework underlying the " E u r o p e a n U n e m p l o y m e n t Project" described i n D r e z e and B e a n [1990a]. I n fact, the G e r m a n contribution to the project [Entorf et al., 1990] presents empirical results which give strong support to the n o t i o n that a lack of produc-tive capacity limited employment growth i n G e r m a n y . T o be sure, whereas their approach emphasizes rationing phenomena stemming from demand a n d capacity constraints, we ignore such d i s e q u i l i b r i u m mechanisms and instead adopt an e q u i l i b r i u m perspective i n w h i c h the capital stock enters as a determinant of l a b o u r market e q u i l i b r i u m . Whenever the wage-setting process exhibits real wage resistance, as equation (12) of o u r m o d e l assumes, a d o w n w a r d shift of the l a b o u r demand schedule due to a fall i n the (trend-adjusted) capital-labour ratio inevitably translates i n t o rising unemployment.
Since we d i d not estimate a wage-setting equation, we cannot say how m u c h a d d i t i o n a l unemployment is i n fact explained by this mech-anism. W h a t we can say, however, is this: T h e disappearance of the G e r m a n real wage gap, though widely interpreted as evidence of
"wage moderation", is perfectly consistent with the view that the per-sistent h i g h unemployment of the 1980s results from a failure of the wage-setting process to adjust to a continued s l o w d o w n of feasible real wage growth.
A referee raised the question whether the strong investment per-formance of West G e r m a n y i n 1990/91 and the concomitant moderate rise i n o u r real wage gap measure might indicate a t u r n a r o u n d i n the trend of the preceding decade. A t the time of writing, it is too early to
tell - a l l the more so as the 1990/91 unification b o o m was followed by a deep recession. H o w e v e r , the events s u r r o u n d i n g the G e r m a n uni-fication demonstrate the force of our argument i n another, sad way.
T h e integration o f a seriously undercapitalized economy meant an abrupt fall i n the capitallabour ratio for the F e d e r a l R e p u b l i c o f G e r -m a n y as a whole. B u t wage-setters, striving for a q u i c k e l i -m i n a t i o n of the East-West wage differential showed very little willingness to take this fact i n t o account. Thereby, they caused a new and presumably persistent unemployment p r o b l e m affecting eastern G e r m a n y , i n par-ticular.
Data Appendix
A l l data are taken from Vierteljahrliche Volkswirtschaftliche Ge-samtrechnung des Deutschen Instituts fur Wirtschaftsforschung (DIW), Berlin, except
- the n o m i n a l interest rate, w h i c h is the " U m l a u f r e n d i t e festverzins-licher Wertpapiere" (Monatsberichte der Deutschen Bundesbank, various issues),
- the capital stock, w h i c h is due to L i i d e k e [Liideke et a l . , 1989, p . 11].
- the user cost o f c a p i t a l , w h i c h were calculated according to Jerger [1993, p p . 197f.] using input series k i n d l y p r o v i d e d b y L i i d e k e .
T h e capital stock is b r o a d l y defined, encompassing capital goods purchased by b o t h the private a n d the p u b l i c sector. A c c o r d i n g l y , the user cost o f c a p i t a l is calculated so as to cover the b r o a d aggregate o f gross fixed investment, t a k i n g into account the different real prices a n d depreciation rates o f different investment categories.
I n the measures o f >>—n and k—n (estimates o f (3') a n d (17)) y refers to (the l o g of) gross national p r o d u c t a n d n to hours w o r k e d , respectively.
T h e wage share (tVN/Y) (estimates o f (4') a n d (17)) is adjusted for changes i n the share o f self employment (base p e r i o d 1960:1) i n the usual manner. See, for example, Sachverstandigenrat [1992, p. 261].
O u t p u t at n o r m a l capacity u t i l i z a t i o n , Y*9 has been calculated according to Sachverstandigenrat [1992, p . 259].
The seasonal adjustment has been done w i t h E Z - X 1 1 , Version 2.00 o f Doan Associates, E v a n s t o n , I L ( U S A ) , w h i c h is a version o f Census X - l 1 o f the US Bureau of Census.
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A b s t r a c t : Unemployment and the Real Wage Gap: A Reappraisal of the Ger-man Experience. - The major European economies experienced a rise in unemployment since the late 1970s. A t the same time, the real wage gap, a widely used measure of wage pressure, declined. This paper develops an analytical framework that relates the two phenomena. Particular emphasis is placed on the interaction of capital accumulation, wage setting and labour demand. The model is applied to the particular case of Ger-many and found to be consistent with the observed behaviour of wages, investment, output and employment.
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Z u s a m m e n f a s s u n g : Arbeitslosigkeit und die Reallohnlucke. Eine Oberprii-fung der deutschen Erfahrung. - Die wichtigsten europaischen Volkswirtschaften erleb-ten seit den spaerleb-ten siebziger Jahren einen Anstieg der Arbeitslosigkeit. Gleichzeitig ging die Reallohnlucke, die weithin als MaB fur den Lohndruck benutzt wird, zuriick. Die Verfasser entwickeln einen analy tischen Rahmen, der diese beiden Phanomene zueinander in Beziehung setzt. Besonzueinanderen Wert legen sie auf das Zusammenwirken von K a p i -talbildung, Lohnfestsetzung und Nachfrage nach Arbeit. Sie wenden das Modell auf den Fall Deutschland an und zeigen, dafi es mit dem beobachteten Verlauf von Lohnen, Investitionen, Produktion und Beschaftigung konsistent ist.