Economic Transformation and Income Change

Abstract

The transition to a market economy under the conditions of unification inevitably created great stresses in the East German economic and social fabric, which large-scale transfers from the West could only ameliorate. The restructuring of the command economy according to the West German social market economy model would introduce much greater income differentiation and redistribution among sub-groups in society, even though an overall higher real level of incomes was to be expected as productivity grew. The German Democratic Republic (GDR) has often been termed an ‘employment society’, where extremely high levels of labour market participation for men and women were required for ideological, social mobilization and broad income equality reasons (Kaelbe et al., 1994, p. 31). A principal risk in market transition was then of much greater social differentiation: a substantial minority could become significantly poorer relative to the much broader band of the middle class, who are often thought of as making up two-thirds of West German society. Of course, in practice, the profound slump, factory closures and large-scale labour-shedding which followed the exposure of the obsolescent, centrally-planned economy to world markets has masked other changes: only one in five of East German employees continues to hold his/her job, such that unemployment and job insecurity are the key threats to household incomes. Ultimately, even though economic recovery and catching-up with the West may require at least fifteen years, the underlying questions of income and income distribution in the East will be determined by productivity levels, the structure of the economy and by the West German ‘social state’ which has been set in place. In this chapter, our concern however is with the first six years of transition, to trace the labour market changes and income differentiation which have taken place.