Left Behind? West-East German Disparities in the Cost of Job Loss

This paper studies regional disparities in the cost of job loss between West and East Germany.

Based on German administrative data, I document that, relative to their pre-displacement level, earnings losses of displaced workers are on average lower in East Germany than in West Germany. A shift–share decomposition shows that roughly one-third of this West–East gap is due to differences in the industry mix of job destruction: after the early deindustrialization of the East, job losses there were less concentrated in manufacturing and more in construction than in the West.

The remaining two thirds reflects smaller earnings losses in the East within industries, which are linked to lower firm wage premia among East German employers. Structural effects - the earnings losses associated with the same job lost across different regions - allow identifying an earnings penalty for displaced workers in the East that is more in line with the weaker labor market performance of the East. Although regional mobility to the West offsets earnings losses among movers, the vast majority of East Germans do not relocate to the West after job loss.

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