The Pathological Export Boom and the Bazaar Effect - How to Solve the German Puzzle

37 Pages Posted: 11 May 2006

See all articles by Hans-Werner Sinn

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

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Date Written: April 2006

Abstract

Germany is the laggard of Europe, yet the country is world champion in merchandise exports. The paper tries to solve this theoretical and empirical puzzle by diagnosing a "pathological export boom" and a "bazaar effect". Excessively high wages defended by unions and the welfare state against the forces of international low-wage competition destroy too big a fraction of the labour intensive sectors and drive too much capital and labour into the capital intensive export sectors, causing both unemployment and excessive value added in exports. Moreover, excessive wages induce too much outsourcing of upstream production activities which implies that export quantities grow too much in relation to value added contained in exports. Finally, excessive wages cause capital flight resulting in a too large current account surplus.

Keywords: trade, wage rigidity, replacement incomes, Germany

JEL Classification: E240, J650

Suggested Citation

Sinn, Hans-Werner, The Pathological Export Boom and the Bazaar Effect - How to Solve the German Puzzle (April 2006). CESifo Working Paper Series No. 1708, Available at SSRN: https://ssrn.com/abstract=901735 or http://dx.doi.org/10.2139/ssrn.901735

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