The Eastern German Labour Market in Transition: Gross Flow Estimates from Panel Data

Following the unification of the two Germanies in October 1990, the former German Democratic Republic was subject to a series of economic shocks, resulting in large declines in output and employment. This paper investigates the behaviour of the East German labour market during the initial stages of the transition to a market economy, using information contained in a unique longitudinal survey of GDR residents taken between November 1990 and November 1991. This study utilises Markovian flow analysis of worker transitions between labour market states. The results demonstrate that the sharp increase in the stock of unemployment is mainly due to large inflows from employment into the state. Flows out of unemployment however, have risen steadily throughout the same period. Inter-industry flows have also increased, primarily into the emerging finance and service sectors. Steady state predictions suggest that the eastern labour market will undergo substantial contraction before stabilizing. Job creation will be dominated by the emerging service sector. Multinominal logistic estimates indicate that, as in western economies, older workers are most at risk of loss of employment and labour force exit. Newly privatised firms are shedding male labour at a faster rate. The result suggest that standard methodologies can have a useful role in the analysis of economies in transition.