Cyclical adjustment, capital-labor substitution and total factor productivity convergence - East Germany after unification

Despite rapid economic integration and massive help from the Federal Government East German productivity catching up faded out in the nineties. This paper presents panel-data estimates of the productivity adjustment based on a production function framework and a stylized adjustment model of the economy. The central empirical result is a decomposition of the sources of productivity growth. The estimates reveal that a large part of productivity growth in the early nineties is related to factors that were specific for those period. The fading out since the mid-nineties is attributed to the development of total factor productivity.