Labor Market Effects of Economic Integration – The Impact of Re-Unification in German Border Regions

The paper argues that economic integration causes problems for the labor market of high-wage countries due to cross-border labor mobility and the accompanying increase in labor supply. Empirical evidence is provided from an analysis of regional labor market effects of German re-unification. In the aftermath of the re-unification shock, despite of some gain in employment, border regions situated at the former German-German border are found to have experienced a fall in the relative wage position and an increase in unemployment relative to other West-German regions. As this points to adverse labor supply effects for resident workers due to cross-border labor mobility this result is bad news for EU regions situated at the border with the Accession countries in Central and Eastern Europe.