Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification

Fifteen years after German reunification, the facts about slow regionalconvergence have born out the prediction of Barro (1991), exceptthat migration out of East Germany has not slowed down. I document that in particular the 18-29 year old are leaving East Germany,and that the emigration has accelerated in recent years. Tounderstand these patterns, I provide an extension of the standard laborsearch model by allowing for migration and network externalities.In that theory, two equilibria can result: one with a high networkingrate, high average labor productivity, low unemployment and no emigration (“West Germany”) and one with a low networking rate, lowaverage labor productivity, high unemployment and a constant rate ofemigration (“East Germany”). The model does not imply any obviouslysound policies to move from the weakly networked equilibriumto the highly networked equilibrium.