Relatively high rates of persistent unemployment plaguing the eastern region of Germany are argued to be caused especially by two factors engendering slack labor demand relative to supply. Demand for East German labor declined as (1) rapid privatization was followed by cross-regional capital...

This rejoinder contrasts a Keynesian approach for explaining unemployment in Germany's eastern region with a neoclassical, market-failure approach advanced by Christian Merkl and Dennis Snower. A skewed distribution of headquarters favoring the western region, combined with insufficient levels...