Strong Exports, High Unemployment, Low Gdp Growth - a Neoclassical Diagnosis of the German Disease (Exportweltmeister, ArbeitsplatzwüSte, Wachstumsschlusslicht - Eine Neoklassische Diagnose Der Deutschen Krankheit)

Abstract

This paper shows that the symptoms of the German Disease - high export growth, high unemployment and low real GDP growth - are easily explained by unbalanced real wage growth within the framework of a neoclassic open economy model: In this model unbalanced real wage growth causes unemployment and a decrease of domestic investment yields. Resulting low domestic investment decreases capital stock growth and hence real GDP growth. The excess supply of domestic savings flows abroad, where yields are higher. This causes a depreciation of the domestic currency or - in case of a monetary union - a relative decrease of the domestic price level compared to the price level of the other member countries of the currency union. As a consequence, demand for domestic exports grows, while demand for domestic imports decreases, such that net exports grow. An empirical analysis reveals that all basic features of this mechanism are found in the data. The policy implications are clear-cut: The gap between domestic labor productivity and the average domestic wage level must be closed in the long run.

Note: Downloadable document is in German.

Keywords: wage-productivity gap, wage policy in a monetary union, German Disease, neoclassic open economy model

JEL Classification: J3, J5, F1, F2