Why Are Labor Force Participation Rates of East German Women So High?

Abstract

As an example of the adjustment of behavior formed in a centrally planned economy and exposed to a free market economy, the paper studies the development of labor force participation by East German women after unification. To isolate the role of participation behavior from that of individual characteristics, we develop a panel data model that simultaneously explains participation, employment and wages. The model parameters, estimated for East and West Germany on the basis of the German Socio-Economic Panel, indicate that distinct behavior could explain the regional gap in participation rates at unification. Afterwards East German women became less willing to participate, but the negative labor supply trend was offset on the aggregate level by changes in characteristics and wages promoting participation.