Extract 1 – The ‘Federal Convergence Initiative’

In 2023, the German Federal Ministry launched its 'Federal Convergence Initiative' to address persistent productivity and earnings imbalances between the highly industrialised Southern states and the transition economies of the East and North. While Southern clusters lead global high-tech and advanced manufacturing productivity, peripheral and Eastern states experience slower growth, leading to significant regional wage disparities as illustrated in Fig. 1.1.

Fig. 1.1 Average Gross Monthly Salary (€) by Region in 2023

Some economists argue that low labour market flexibility—specifically low geographical mobility—is the primary obstacle to wage convergence. A key driver is the divergence in residential rents and property costs across regions, shown by the index values in Fig. 1.2. High living costs in cities like Munich or Stuttgart create financial barriers, preventing households in low-wage states from relocating and blocking the supply-side adjustment that would normally equalise wages.

Fig. 1.2 Regional Rent and Property Price Index 2005–2023 (Base Year = 2005)

Other supply-side rigidities also impair flexibility. These include non-standardised professional qualification recognition across different federal states (Bundesländer), language and integration barriers for foreign-born workers, and weak high-speed commuter transit networks in rural communities. However, hybrid and remote working models are beginning to reduce physical commuting requirements for office-based roles.

Conversely, others suggest that demand-side structural disparities are the real drivers of regional differentials. The concentration of highly skilled university graduates is highly skewed toward the Southern regions. Additionally, massive corporate investments in cutting-edge industries (such as automated automotive technology, pharmaceuticals, and AI) remain heavily clustered in the South, boosting local labour demand and raising the marginal revenue product of labour ($MR{P}_L$). Meanwhile, capital-labour substitution has disproportionately automated mid-level roles in traditional manufacturing heartlands, leaving local labour markets with excess supply.