German reunification: Welfare gains and losses East and West

A framework of welfare accounts (Juster and Stafford, 1985; Headey, 1993; see also Goodin et al., 1999) is used to assess gains and losses to East and West Germans in the post-reunification period, 1990-97. The welfare accounts have three segments: a capital/stocks account, an income/flows account and a subjective welfare/psychic income account. This framework differs from conventional welfare economic accounts in explicitly defining and measuring welfare in psychological terms ... as perceived utility/satisfaction. It has recently been argued that this approach is required, if one accepts that individual utilities are not exogenous but are affected by changing comparisons with others (Duesenberry, 1949; Easterlin, 1974, 1995; Hollaender, 2001). Our hypotheses are that in the post-reunification period West German welfare was sacrificed - in all three segments of the accounts - in order to permit resources to flow to East Germans and to boost their stocks, flows and utilities. The hypotheses are supported in the case of West Germans, but results are mixed for East Germans. Our data source is the German Socio-Economic Panel (GSOEP) which began in 1984 in West Germany and has involved reinterviewing a very large representative national sample every year since. The panel was extended to East Germany in June 1990, before formal reunification occurred, and so provides a picture of stocks, flows and utilities before the effects of integration into the Federal Republic were felt.