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Transforming Institutions: Labor Reallocation and Wage Growth in a Reunified Germany


Time: 09:00 am-10:30 am, Oct. 28th, 2022

Platform: Zoom

Speaker: Tommaso Porzio

(Columbia University)

Link: https://us06web.zoom.us/j/81626164288?pwd=Zmp1VG41dXF0by9UZTBRVkxSbjJWZz09

Meeting ID: 816 2616 4288

Passcode: inse



How do institutions affect economic performance? We exploit a unique historical episode, the German Reunification, to investigate how this radical change transformed East Germany’s labor market allocation, igniting wage growth in the early years after reunification. Using matched employer-employee data constructed from the universe of German social security records, we show that the sharp growth in East German wages strongly correlates with a rapid reallocation of workers across plants within East Germany. Moreover, reallocation was disproportionately larger among older cohorts, suggesting that longer exposure to communist institutions led to more severe misallocation: In a competitive market, these older workers would have switched jobs or been fired at a younger age. By the same token, only East German plants that already existed at the time of reunification display different reallocation patterns compared to their Western counterparts: Large plants downsize, indicating that they had previously been inefficiently large, while all plants experience significant levels of worker turnover. We find that plants with larger levels of reallocation experience larger wage growth. This provides rare, direct empirical evidence that the reallocation of workers — both within and across plants— spurred by new labor market institutions, was consequential for wage growth.





Professor Tommaso Porzio is an assistant professor of macroeconomics in the Economics Division at Columbia Business School. His research primarily studies the role of human capital for growth and economic development with a focus on understanding the barriers that may prevent individuals from exploiting their talent. His work has been published in the American Economic ReviewEconometrica, and the Journal of Political Economy. Professor Porzio is also a faculty research fellow at NBER and an affiliate at BREAD, CEPR, and Y-RISE. Prior to joining Columbia, he was an assistant professor at the University of California, San Diego. Professor Porzio received his Ph.D. in Economics from Yale University in 2016.