Unemployment and the Wage Wedge in Germany | Simulations of a Small Cointegrated System

There seems to be a consensus in current public discussions that supplementary wage cost in Germany have to be reduced. The paper analyses the quantitative effects of supplementary wage cost (additions to net wages) on growth, employment, unemployment and net and gross wages in West Germany. This is done by means of a dynamic structural equation system, which can be understood as a cointegration system. Obviously this system has to be supply-oriented in order to pick the long run effects on labour demand and productivity growth. The demand side determines the long run exchange rate versus the trade balance. Our simulations show that the supplementary wage cost are an important determinant of the level of output, employment and unemployment and are therefore especially suited for an active employment policy by the government