The political changes that have taken place in Eastern European countries since the mid-1980s have facilitated increased emigration from these countries, particularly of ethnic and religious minorities. A considerable proportion of these emigrants have been ethnic Germans who have moved to the Federal Republic of Germany (FRG). In addition, the political collapse of the German Democratic Republic (GDR) in 1989 paved the way for another wave of immigration into the FRG.

Thomas Mayer

The political changes that have taken place in Eastern European countries since the mid-1980s have facilitated increased emigration from these countries, particularly of ethnic and religious minorities. A considerable proportion of these emigrants have been ethnic Germans who have moved to the Federal Republic of Germany (FRG). In addition, the political collapse of the German Democratic Republic (GDR) in 1989 paved the way for another wave of immigration into the FRG.

The scale of recent immigration has given rise to concerns about its economic and political effects in west Germany. The purpose of this chapter is to provide some historical perspective on immigration into west Germany, discuss the outlook for the next few years, and assess some of the likely economic effects and the appropriate policy response.

Historical Perspectives1

Migration of ethnic Germans from Eastern European countries and the eastern parts of the German Reich began with the retreat of the defeated German army at the end of World War II. At the beginning of the war, 9.6 million Germans lived in those eastern parts of the German Reich that, after the war, were outside the boundaries of the GDR (East Prussia, East Pomerania, East Brandenburg, and Silesia). A further 8.8 million ethnic Germans lived in other areas of eastern and southeastern Europe (for example, the U.S.S.R., Hungary, and Romania). Beginning in June 1945, many of these Germans were expelled and by the end of 1950, the number of ethnic Germans living outside the FRG and the GDR had fallen to 4.2 million; about 4.1 million had moved to the GDR and some 8 million to the FRG.

During the 1950s and 1960s, significant immigration from Eastern European countries continued, although on a much reduced scale (Table 1). Immigration from the GDR, on the other hand, picked up until east Germany closed its borders to the west in 1961. Thus, between 1950 and August 13, 1961, the day the Berlin wall was erected, 2.6 million people moved from the GDR to the FRG; after the closure of the border between the GDR and the FRG, the number of immigrants dropped markedly, with only 264,000 crossing from east to west Germany in the rest of the 1960s. Between 1970 and 1986, immigration averaged 57,000 persons a year. In the aftermath of the political changes in Eastern European countries, immigration gathered steam in 1987 and strengthened further in 1989, with the surge in immigration from the GDR. Thus, between 1950 and the end of 1989, the FRG received more than 5½ million immigrants from the east; about 2 million immigrated from the Eastern European countries and the rest from the GDR. These immigrants came in addition to the 8 million people who had moved to the territory of the FRG in 1945–49.

Table 1.

Federal Republic of Germany: Immigration from the East and Macroeconomic Developments

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Sources: Statistisches Bundesamt, Wirtschaft und Statistik, September 1989, pp. 584–85, and Bundesanstalt für Arbeit, Arbeitsmarkt in Zahlen

Unemployed in percent of the dependent labor force in December of each year; not seasonally adjusted.

Of this, 345,590 persons immigrated from the GDR between the beginning of 1960 and August 13, 1961 when the GDR authorities closed the border.

Immigration from Eastern European countries is expected to continue at a high level over the next few years as it has been estimated that there are 3–4 million people in these countries who are of German descent.2 There could also be sizable further immigration from east Germany during the time of structural change and adjustment to a market economy. An important question is whether migration from east Germany to west Germany will continue until the wage gap between the two parts of Germany has been substantially closed. Since it is expected that it will take at least 10–15 years until labor productivity in east Germany reaches the level prevailing in west Germany, some have argued that wage subsidies will be needed in order to stem the flow of emigration and prevent an economic collapse in the east. Both assumptions—that only wage equalization can stop the flow of migration and that wage equalization should be achieved in the short to medium term through subsidy payments—need to be examined.

To put the existing wage gap between east and west Germany in perspective, it is useful to examine wage differentials that exist between regions of west Germany. Table 2 presents, for a variety of industries, a comparison of hourly wages of male blue-collar workers in the Länder of west Germany; this comparison shows that, in 1988, wages varied within industries by up to 35 percent of earnings in low-paying regions.3 Owing to differences in the economic structure of the Länder, GDP per capita showed an even larger regional spread; in the richest area it was more than twice that in the poorest area (Chapter IV, Table 1). However, this latter comparison is somewhat distorted by the rather small but densely populated city states (Berlin, Bremen, and Hamburg). If these city states are excluded, the difference between the highest and lowest GDP per capita was reduced to 35 percent of the level in the poorest region. Moreover, it is also likely that income comparisons between the Länder are affected by government transfer payments.

Table 2.

Federal Republic of Germany: Regional Distribution of Earnings of Blue-Collar Workers, 1988

(Federal Republic of Germany = 100)

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Source: Bundesministerium für Wirtschaft, “Das regionale Lohnkostengefalle in der Bundesrepublik Deutschland,” Beilage zum Monatsbericht 11/89.

Since these wage and income differentials have not given rise to large-scale migration within the FRG, it is clear that there are other factors that discourage migration. These seem to include home ownership; differences in the cost of living, particularly housing; family ties; and the attachment to certain regions. Thus with political unification, the implementation of comprehensive economic reforms and the end of special social benefits granted to GDR immigrants under FRG law in the past, the factors that militate against migration should be felt more clearly.4

But what should be the response of economic policy if migration remains large? Wage subsidies would boost wages in the east but would also run the risk of becoming entrenched and creating a distorted economic structure, inflexible in responding to market signals. Moreover, feasible subsidies would not be sufficient to discourage many of those determined to leave because of better job prospects in the west. An alternative scheme to discourage migration by linking distribution of public property to long-term residency in the former GDR was also suggested at the time GEMSU was being designed.

It is clear that migration of skilled workers from east to west would have adverse effects on the east German economy. In the context of a unified Germany, the rationale behind the economic policy response to migration from east Germany should also take into account the effects on the west German economy. Indeed, irrespective of what happens to population flows between east and west Germany, significant immigration into west Germany from Eastern European countries is likely to continue for a number of years, as the economic outlook for these countries remains relatively less favorable. Economic policy will therefore have to take account of sizable immigration. It is on the effects of immigration in west Germany and the appropriate policy response that the remainder of this chapter focuses.

Effects of Immigration and Policy Response

In the history of the FRG, large-scale immigration from the east has generally coincided with phases of strong growth (see Table 1). Absorption of the immigrants on the labor market has therefore rarely been a problem. During the 1950s, when immigration totaled more than 2½ million people, growth of real GNP per capita averaged 6¾ percent and the unemployment rate declined from 11½ percent of the dependent labor force to 2½ percent. During the 1960s, a further 840,000 people moved to the FRG, but unemployment dropped to a historical low and real GNP per capita grew at an average rate of 4 percent. Reflecting, inter alia, the effects of the first oil shock in 1974, growth fell to just under 3 percent on average in the 1970s and unemployment increased to 3¼ percent; at the same time, immigration declined to about 500,000 people. During the first eight years of the 1980s, immigration continued at a slightly faster annual rate than in the 1970s, while growth was low and unemployment high by historical standards. In contrast, the surge in immigration in 1988–89 was accompanied by more rapid growth and a decline in unemployment.

One should be cautious, however, in interpreting this apparent inverse relationship between economic activity and immigration. Migration can occur for reasons that are unrelated to the economic environment, such as changes in the political climate of the country that the migrant is leaving or changes in the receptiveness of the area to which the migrant is traveling, but it can also be encouraged by favorable economic developments in the recipient country. Migration can also influence economic performance in the recipient country; for example, the apparently inverse relationship between economic growth and immigration that can be observed in the past has prompted the argument that immigrants have helped to lower structural unemployment in west Germany by removing bottlenecks in the labor market.5 This would seem to be supported by the recent experience. Data on arrivals of and unemployment of immigrants from Eastern European countries and east Germany suggest that the majority of immigrants have found employment6 (Table 3) and, moreover, the overall unemployment rate has fallen. But the successful integration of immigrants seems also to have been helped by the favorable economic climate that existed during these years and the moderate wage increases embodied in multiyear contracts agreed upon in 1987–88.

Table 3.

Federal Republic of Germany: Migration and Unemployment

(In thousands)

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Source: Bundesanstalt für Arbeit, Arbeitsmarkt in Zahlen.


Change from September of the previous year.

From July 1990, data on immigration from the GDR was not collected.

The likely continuation of sizable immigration in the coming years raises the question of what policies should be adopted to facilitate the absorption of immigrants in the labor market.7 In the following analysis, a computable general equilibrium model is used to investigate this question. The model is comparative-static and belongs to the type of so-called Johansen models. It follows closely the version developed by Dixon and others (1982) and is described in detail in Mayer (1989).8

The simulation exercise assumes an inflow of about 700,000 people into west Germany in 1990—400,000 from Eastern Europe and 300,000 from east Germany. Assuming a participation rate of about 52 percent,9 this would lead to an increase in the labor force by 364,000 people or 1¼ percent from its 1989 level.10 The simulations trace the effects of different policy responses to this inflow. In policy scenario 1, it is assumed that trade unions resist any decline in real wages. In this case, it would not be possible for the new immigrants to find work immediately and they would have to receive unemployment compensation. The second scenario assumes that unions resist cuts in nominal wages. The immediate effect of this wage policy on the employment of new immigrants is the same as in the first scenario, that is, they will not find jobs upon arrival. The second-round effects, however, are likely to differ as real wages react to changes in the price level. In the third and fourth scenarios, it is assumed that real wages adjust to allow the increase in the labor force to be absorbed; thus, unemployment does not increase in response to the flow of immigration. Scenarios 3 and 4, however, differ both from each other and from the first two scenarios in their assumptions about the stance of monetary and fiscal policy during the period of labor inflow. In scenarios 1 and 2, immigration leads to an increase in government transfers in the form of unemployment compensation; this gives rise to a corresponding increase in nominal private consumption.11 Real government consumption remains unchanged and monetary policy accommodates the resulting changes in nominal incomes and absorption. In scenarios 3 and 4, on the other hand, it is assumed that fiscal and monetary policy stabilize, respectively, 2nominal domestic absorption or the external balance of the economy, while the labor force increases.12

The key elements of the simulations are presented in Table 4. The results in columns 1–4 indicate percentage deviations of the listed variables from the values they would have attained in the absence of immigration and the assumed policy responses after all domestic and international effects have worked their way through the economy. The analysis is comparative-static in character and the results are of course contingent on the numerous model assumptions and the chosen parameter values. The purpose of the exercise is merely to illustrate the effects of migration under different policy scenarios after an appropriate adjustment period of perhaps one to two years, and not to make forecasts of the likely outcome.

Table 4.

West Germany: Economic Effects of Immigration—Main Simulation Results

(Deviations from baseline in percent)

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In percent of GDP.

Evaluated at foreign currency prices.

The assumed increase in government transfers and nominal private consumption in response to the inflow of 364,000 workers under scenario 1 (fixed real wages) raises prices and induces a small expansion of output.13 The additional demand in the form of real private consumption and investment exceeds the increase in output so that real exports decrease, imports increase, and the external surplus declines slightly. Employment increases but only by a small amount, leaving in the event some 336,000 of the 364,000 new workers still unemployed after adjustment is completed. The money supply expands to accommodate domestic demand and the government deficit rises owing to higher transfers and nominal government consumption that are only partly offset by increased government revenue. The rise in domestic demand benefits primarily production of nontraded goods; heavier demand for basic goods and tradables is met by a reduction in exports and an increase in imports.

In scenario 2, unions are satisfied with maintaining nominal wages. In the first round, real (consumption) wages decline by the amount that consumer prices increase in response to higher consumption (induced by increased government transfers). The decline in the real product wage is thus greater than in scenario 1 and this allows a slightly stronger second-round output response with a somewhat more favorable outcome for inflation. The decline in exports is smaller than in the previous scenario, but imports increase at about the same rate, as higher demand for inputs by domestic industries offsets lower demand for imported consumption goods. Output and employment rise in all sectors, but the expansion is largest for nontradable goods, where the additional demand cannot be satisfied from external sources. Reflecting the stronger output response, there is a larger increase in employment than in scenario 1, but about 281,000 of the new immigrant workers remain unemployed after adjustment is completed.

With flexible nominal and real wages and macroeconomic policies directed at maintaining nominal domestic absorption, real wages fall by 0.8 percent to absorb the rise in the labor force and output is boosted by almost the same amount (scenario 3). Reflecting lower production costs, consumer prices decline by 0.6 percent from the level they would have reached otherwise and real domestic absorption increases. Lower product prices improve the competitiveness of German industries so that exports rise. Imports grow by a smaller amount, since the effects of higher total demand are largely offset as demand shifts from imports to domestic goods in response to the fall in the price of domestic output relative to baseline. Reflecting the decline in the terms of trade, real income increases by slightly less than output. Moreover, the decline in the terms of trade offsets the increase in real net exports, and the external balance evaluated at foreign currency prices weakens slightly. In fact, the change in the foreign balance is so small that macroeconomic policies directed at stabilizing the external position of the economy rather than domestic demand have broadly similar effects (scenario 4).

Against the background of high immigration, wage bargaining by unions could, broadly speaking, pursue two alternative objectives. It could aim at maintaining the real or nominal wage level of job holders or it could aim at maximizing aggregate labor income. Real wage flexibility, though lowering wage income of job holders, would result in higher aggregate labor income (scenarios 3 and 4). Real wage flexibility would also be preferable from a macro-economic view as it would have a more favorable effect on inflation, unemployment, and government finances.14

The key question therefore is the objective function of unions. The findings in Chapter VII would suggest that unions in the FRG have tended to represent the insiders in the labor market, that is, those already employed. Large-scale migration can erode some of the bargaining power of insiders by lowering the wages asked by outsiders in the labor market. However, to the extent that the power of insiders is due to structural rigidities under the influence of the Government, there is a role for the Government in promoting greater flexibility. Elements of the legal structure in Germany that increase the cost of labor turnover or that extend a wage agreement to groups or sectors not party to the agreement should be examined carefully in this light.15 It is clear why insiders in the labor market might be concerned about high levels of immigration. However, it is worth noting that, to the extent that labor stays in the east and capital moves from west to east, there will be downward pressures on wages in west Germany, though these perhaps would materialize over a longer time period.

Concluding Remarks

The discussion in this chapter leads to a number of broad conclusions: First, wage and income differentials between different regions of west Germany suggest that it may not be necessary to completely eliminate wage differentials between west and east Germany in the near future in order to slow the flow of migrants to a more sustainable level for the east German economy. Second, historically, periods of high immigration have tended to coincide with high growth and low unemployment in the FRG. This experience and the present strength of the west German economy suggest that a continuation of the flow of immigration of the order of magnitude experienced in 1988–89 should not pose an insurmountable problem. Third, to enhance the prospect that the favorable experience with the absorption of immigrants will continue, structural policies should be used to reduce impediments to wage flexibility in the economy. Indeed, the greater the ease with which immigrants are absorbed in the labor market, the better placed Germany will be to cope with the surge in demand resulting from unification.


  • Deutsches Institut der Wirtschaft, Die Integration deutscher Aussiedler: Perspektiven für Bundesrepublik Deutschland (Cologne, 1989).

  • Dixon, P.B., B.R. Parameter, J. Sutton, and D. Vincent, ORANI—A Multisectoral Model of the Australian Economy (Amsterdam and New York: North-Holland, 1982).

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  • Lipschitz, Leslie L., Jeroen Kremers, Thomas Mayer, and Donogh McDonald, The Federal Republic of Germany: Adjustment in a Surplus Country, IMF Occasional Paper, No. 64 (Washington: International Monetary Fund, January 1989).

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  • Mayer, Thomas, “Economic Structure, the Exchange Rate, and Adjustment in the Federal Republic of Germany: A General Equilibrium Approach,” Staff Papers, International Monetary Fund (Washington), Vol. 36 (June 1989), pp. 435-63.

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  • Statistisches Bundesamt, Wirtschaft und Statistik (Wiesbaden), September 1989, pp. 582-89.

  • Walter, N., “Demographic Factors and Economic Momentum—Wave of Corporate Start-Ups in Germany Imminent,” Deutsche Bank, Bulletin (Frankfurt), October 1988.

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For additional details on immigration flows, see Statistisches Bundesamt (1989).


Differences in purchasing power, however, are likely to have been smaller as prices for nontradable goods, such as housing and personal services, also differ significantly across regions.


In principle, the prospects for relatively large wage increases in line with increases in productivity should dampen incentives for emigration of those holding jobs in east Germany. Moreover, social security payments in west Germany to people migrating from east Germany are now based on their past earnings in east Germany, discouraging migration of those without good job prospects in the west.


In June 1990, about 235,000 immigrants from east Germany and Eastern Europe were unemployed, equivalent to 14 percent of the total number of immigrants (including those not in the labor force) between January 1985 and June 1990.


The Deutsches Institut der Wirtschaft (1989) examined the implications of immigration by ethnic Germans on the finances of the social security system and concluded that, owing to the favorable age structure of immigrants, there will be positive effects in the medium to long term.


The model emphasizes the role of relative prices and substitution possibilities in explaining trade flows and the commodity composition of domestic production and demand. The essential postulates governing producer and consumer behavior are profit and utility maximization. The model distinguishes four productive sectors (one producing basic goods such as agricultural products and energy, the second producing traditional tradable goods such as steel, ships, textiles, and clothing, the third producing all remaining tradables, and the fourth producing nontradables such as personal and financial services); four categories of final demand (investment, government consumption, private consumption, and exports), satisfied either from domestic sources or from imports; and three primary inputs (labor, capital, and land). It is numerically specified using a 1984 input-output table for the FRG and parameter estimates culled from the literature. Some important assumptions are (1) capital and land are fixed factors of production in each sector; (2) investment does not add to the productive capital stock in the current period; (3) markups in foreign trade are proportional and constant; and (4) the nominal exchange rate does not change.


In 1989, about 52 percent of the immigrants from Eastern Europe were ready and willing to take up work and the same participation rate is expected for 1990. Recent evidence suggests that the participation rate of immigrants from east Germany, after higher rates in earlier years, is now converging to the rate of other immigrants.


This illustrative exercise abstracts from the lags between immigration flows and increases in the labor force, lags that are due to the need for immigrants to take German language classes or enroll in training programs.


On the basis of average unemployment compensation payments, government expenditures (in the form of transfers) are assumed to increase by DM 7 billion or 0.7 percent of the total government expenditures in 1989. Under the assumption that there are no savings out of unemployment compensation, nominal private consumption is expected to increase by 0.6 percent from its 1989 level.


The reason for differences among the scenarios in the macroeconomic policy stance will become apparent from the discussion below.


The real wage is fixed in terms of the consumption basket. With domestic demand and prices rising, the terms of trade improve and the real product wage declines, allowing a rise in employment.


This comparison of scenarios 1 and 2 with scenarios 3 and 4 is not materially distorted by differences in the assumed stance of macroeconomic policy; indeed, if the policy stance in scenarios 1 and 2 had been to maintain nominal absorption, there would have been no decline in the real product wage and hence no increase in output and employment.


See Lipschitz and others (1989), Section IV for a discussion of the structural features of the labor market in west Germany.