West German unemployment in the 1980s

A number of commentators in the discussion yesterday doubted whether West Germany had non-natural rate unemployment just before unification.  I didn't cover this in detail because I thought it was commonly accepted, but I'll offer up more evidence and it suggests oth unemployment and a deficiency of aggregate demand at the time.  Here, from the Kansas City Fed, is one typical account of West Germany, from 1989:

Thus, unemployment increased steadily from 1970 to 1988.  What caused this asymmetric effect of monetary policy on unemployment?  As argued below, restrictive monetary policy in combination with adverse external shocks…

The article describes West Germany as, through the 1980s, having had "persistently high unemployment."  (Keep in mind that less than twenty years before the unemployment rate in West Germany was one percent, though the natural rate was rising over time.)  

There were also plenty of structural reasons for West German unemployment, but those nominal and real rigidities are potentially amenable to macroeconomic policy.  Here's another treatment, from 1990, noting the persistent unemployment in West Germany, in excess of the natural rate.  This lengthy study, while finding AD deficiencies to be one factor behind West German unemployment, focuses on structural causes of unemployment, most of all wage rigidities.  That's a moot point; those unemployed workers still should benefit from well-executed fiscal and monetary policy, at least to the extent one believes such policies to be effective.  The study also finds that frictional unemployment and structural unemployment in the Lilien sectoral shift sense — the kinds that don't respond well to fiscal policy under any account — to be slight in West Germany at that time.


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