Labor Market Effects of Economic Integration - the Impact of Re-Unification in German Border Regions

Abstract

The paper argues that economic integration causes problems for the labor market of high-wage countries due to cross-border labor mobility and the accompanying increase in labor supply. Empirical evidence is provided from an analysis of regional labor market effects of German reunification. In the aftermath of the reunification shock, despite some gain in employment, border regions situated on the former German-German border are found to have experienced a fall in the relative wage position and an increase in unemployment relative to other West-German regions. As this points to adverse labor supply effects for resident workers due to cross-border labor mobility, this result is bad news for EU regions situated on the border with the Accession countries in Central and Eastern Europe.

Keywords: economic integration, border regions, EU enlargement, German re-unification, differences in differences estimation

JEL Classification: J61, R23, F15