Sectoral transformation, turbulence, and labour market dynamics in Germany

The secular rise of European unemployment since the 1960s is hard to explain without reference to structural change. This is especially true in Germany, where industrial employment has declined by more than 30% and service sector employment has more than doubled over the past three decades. Using individual transition data on West German workers, we document a marked increase in structural change and turbulence, in particular since 1990. Net employment changes resulted partly from an increase in gross flows, but also from an increase in the net transition yield at any given gross worker turnover. In growing sectors, net structural change was driven by accessions from nonparticipation rather than unemployment; contracting sectors reduced their net employment primarily via lower accessions from nonparticipation. While gross turnover is cyclically sensitive and strongly procyclical, net reallocation is countercyclical, meaning that recessions are associated with increased intensity of sectoral reallocation. Beyond this cyclical component, German reunification and Eastern enlargement appear to have contributed significantly to this accelerated pace of structural change.