Market Size and Spatial Growth – Evidence from Germany’s Post-War Population Expulsions

Michael Peters

Preliminary, December 2019


This paper examines the long-term impact of forced transfers of Ethnic Germans from East German Territories to West Germany in the aftermath of the Second World War. Between 1945 and 1948, almost eight million ethnic Germans were forcibly resettled in West Germany, increasing the population in receiving areas by more than 20 percent. Refugees were assigned to rural, low population density localities where housing was relatively abundant. The author exploits the cross-sectional variation in refugee inflows to estimate the relationship between changes in population size and income per capita in the short- and the long-run. The analysis is based on a novel panel dataset for 500 West German counties between 1930 and 1970 constructed from a variety of original historical sources. The author also employs an instrumental variable approach, instrumenting the distance to pre-war population centers in Eastern Europe.

The data reveals that the initial allocation of refugees was very persistent and constituted an important source of long-run regional population growth. By 1961, i.e. 10 to 15 years after the initial settlement, populations of counties that received more refugees were still substantially larger and the share of refugees was still higher. Quantitatively, an increase in the share of refugees by 10 percentage points lead to an increase in population size by 1961 of 13 percent.

The author demonstrates a positive relationship between the allocation of refugees and manufacturing employment growth in the 1950s and 60s. The expansion of the local manufacturing sector was helped by inflows of refugees, who often ended up as manufacturing workers. The illustration below shows the agricultural employment share (left panel) and the manufacturing employment share (right panel) for the cohort of workers born between 1915 and 1919, with the vertical line indicating the time of the expulsion. Among refugees, 20 percent of the twenty-year olds in 1939 used to work in the agricultural sector, but only 8 percent did so after resettlement in West Germany. At the same time, the percentage of refugees in this cohort who were employed in manufacturing increased from 44 percent to 57 percent after resettlement.

The analysis also shows that the inflow of refugees raised local productivity, with productivity gains accruing slowly over time: while the effect of refugee inflows on income per capita in 1950 is statistically indistinguishable from zero, it is positive and large in the late 50s and early 60s.

The author proposes a model of spatial growth to explain these findings, highlighting a distinction between the short-run and long-run elasticity of productivity with respect to population size. He estimates that long-run scale elasticity is about eight times as large as short-run scale elasticity. At the aggregate level, the settlement of refugees increased income per capita by about 25 percent after 25 years, compared to the short-run effect, which lowered income per capita by 5 percent.