ABSTRACT
Proximate determinants of regional convergence appear to be relative investment levels and levels of cost competitiveness. Unification policy in Germany has promoted high levels of investment in the new Länder, which would tend to boost convergence but has led to poor cost competitiveness, which hinders convergence. The weakness in cost competitiveness of east German business reflects the specific characteristics of the economy into which the new Länder have been drawn. Labour cost competitiveness comprises two elements: the cost of wages and social security contributions per employee in east as compared with west Germany and relative productivity levels of the two regions. The much more rapid convergence of relative labour costs as compared to relative productivity levels created a competitive disadvantage for east German business. The instant transfer of the west German wage setting and social security systems was responsible for the former; the protracted difficulties in transferring the training system, the inter-firm networks and technology transfer systems are responsible for the persistence of the latter.
