Divergence in Labour Force Growth: Should Wages and Prices Grow Faster in Germany?

70 Pages Posted: 4 Aug 2020

See all articles by Thomas Beissinger

Thomas Beissinger

University of Hohenheim; IZA Institute of Labor Economics

Joël Hellier

LEM-CNRS (UMR 9221)

Martyna Marczak

University of Hohenheim

Abstract

We develop a model which shows that wages, prices and real income should grow faster in countries with low increase in their labour force. If not, other countries experience growing unemployment and/or trade deficit. This result is applied to the case of Germany, which has displayed a significantly lower increase in its labour force than its trade partners, except in the moment of the reunification. By assuming that goods are differentiated according to their country of origin (Armington's hypothesis), a low growth of the working population constrains the production of German goods, which entails an increase in their prices and in German wages.This mechanism is magnified by the low price elasticity of the demand for German goods. Hence, the German policy of wage moderation could severely constrain other countries' policy options. The simulations of an extended model which encompasses offshoring to emerging countries and labour market imperfections suggest that (i) the impact of differences in labour force growth upon unemployment in Eurozone countries has been significant and (ii) the German demographic shock following unification could explain a large part of the 1995-2005 German economic turmoil.

Keywords: population growth, labour force, inflation, wages, Germany

JEL Classification: E24, F16, J11, O57

Suggested Citation

Beissinger, Thomas and Hellier, Joël and Marczak, Martyna, Divergence in Labour Force Growth: Should Wages and Prices Grow Faster in Germany?. IZA Discussion Paper No. 13538, Available at SSRN: https://ssrn.com/abstract=3665098 or http://dx.doi.org/10.2139/ssrn.3665098

Thomas Beissinger (Contact Author)

University of Hohenheim ( email )

Schloss Museumsflügel
Stuttgart, 70593
Germany

HOME PAGE: http://labour.uni-hohenheim.de/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joël Hellier

LEM-CNRS (UMR 9221) ( email )

104, avenue du peuple Belge
Villeneuve d'Ascq Cedex, 59655
France

Martyna Marczak

University of Hohenheim ( email )

Schloss, Museumsfluegel
Stuttgart, 70593
Germany

HOME PAGE: http://labour.uni-hohenheim.de/

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