10 Maps of Germany’s Economic Divisions
Politicians, analysts, critics and the like talk a lot about the economic situation in Germany, but it is not all the same everywhere in the country. Whether due to historical factors, political differences or geographical advantages, the various regions and federal states have an uneven distribution of industrial capabilities, highly skilled workforce and financial conditions. This, in turn, impacts growth prospects and employment, leading to some states being more attractive for investors than others. In the following 10 charts, I attempt to summarize some of the most impactful differences.
It is all about location, location, location…
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1. German start-ups
The biggest startup locations in the country are Berlin, North-Rhine Westphalia, Bavaria and Baden-Württemberg. At the same time, most of the East German federal states (Bundesländer), as well as Bremen, Saarland and Rhineland-Palatinate have been much less attractive as places for new companies. The regions that have managed to attract founders to establish their companies there and have become true hubs are those that have been able to offer valuable business opportunities, support and incentives. For example, in Stuttgart, there are numerous possibilities for startups to cooperate with global industry companies such as Bosch, Daimler-Benz or Porsche. While cities in the Rhein-Main (e.g. Frankfurt, Darmstadt) and the Rhein-Ruhr (e.g. Cologne, Düsseldorf) regions have created an interconnected ecosystem supporting international development and growth.
2. Concentration of businesses
One of the major reasons why this map has taken the shape it has is historical — as it reflects very closely the former split between West and East Germany. After the fall of the Berlin Wall, the former East managed to narrow the gap with the West on many economic measures to some extent, but many differences still remain — including business locations. Over 90% of the largest 500 German companies are based in the West and research shows that companies of comparable size in the former East are still about 20% less productive than their Western counterparts. The fact is that after reunification, the eastern states did not properly reindustrialize so they were not able to reach a level on par with the West. Unfortunately, this is a problem as it impacts the demand for highly qualified labor and therefore employment opportunities. It influences internal and international migration as a result and creates a feedback loop that helps perpetuate the more underdeveloped condition of the East.
3. Locations of DAX companies
As a consequence of what was mentioned in the previous section, the majority of the companies listed on the stock market today are headquartered in the Western states. In fact, the only company headquartered in Berlin that is today a constituent of the core DAX index is the online retailer Zalando, which was only added after the stock index was expanded to include 40 companies in 2021 (it previously only had 30). Large corporations, financial institutions and the government have stated that the catch-up of the former East with the West may have stalled. One reason is the way state-owned enterprises were carved up and privatized after the reunification. But there is also lower productivity, a lack of infrastructure, and availability of commercial land, all of which are significant factors preventing stronger growth and innovation in the East.
4. Attractiveness for foreign investors
KPMG recently conducted a survey, which it published in its Business Destination Germany report for 2024. It showed that among the biggest foreign investors in Germany, the most preferred federal states for investing are North-Rhine Westphalia and Bavaria, followed by Baden-Württemberg and Hesse. The main reason why much of the rest of the country has a lot lower priority for investors compared to these 4 regions, is that they offer an attractive combination of well-developed industrial and commercial infrastructure, a better location in a European context, large markets, and they dominate in terms of universities, research institutes, innovative potential, as well as highly qualified and well-educated workers.
5. A fragmented economy and an uneven growth
Nearly 54% of German GDP is produced in just 3 states — North-Rhine Westphalia, Bavaria and Baden-Württemberg. If you add Hesse and Lower Saxony, that is over 71% of the economy in 5 of the 16 federal states. Meanwhile the former East, excluding Berlin, barely exceeds 11% of GDP. This confirms the points made in the previous sections and once again underscores the need to prioritize re-developing the Eastern states as there could very well be underutilized potential. For example, if we take a look at the chart on the right, we will see that the East is in fact recovering faster than the West from the economic shocks of the last 2 years. Growth picked up more in Brandenburg and Mecklenburg-Vorpommern compared to elsewhere in the country, while Rhineland-Palatinate, Hamburg, and Schleswig-Holstein were among the states with the highest economic contraction.
6. Skills distribution
One of the greatest challenges that the German economy has to deal with is the shortage of skilled workers. Data from the Cologne Institute for Economic Research show that about two-thirds of all professions that require a university degree or vocational training are currently difficult or impossible to fill and this number is expected to keep rising. Some areas such as engineering, mathematics, natural sciences and technology are particularly hard hit. The demographic situation and the retirement of older generations of skilled workers without sufficient replacement is one driver of this problem. Another one is education and vocational training.
The maps above show the regional differences that influence the distribution of skilled workers and while in absolute terms the most industrial states dominate (i.e., Bavaria, North-Rhine Westphalia and Baden-Württemberg), in relative terms (in relation to the numbers of employees), the numbers are higher in Berlin, Hamburg and Hesse, and lowest in Saxony-Anhalt. But in any case, current surveys show that companies in East Germany are more affected by the shortage of skilled workers than in the rest of the country, especially in the manufacturing sector where the ifo Institute estimates that the shortage of skilled workers is more than 16 percentage points higher than the average for Germany. Experts do point out that the labor supply in eastern Germany is declining faster than elsewhere.
7. Labor market integration of immigrants
Another key challenge for the German labor market is the extent to which it successfully enables the integration of immigrant workers. Here the map shows mostly a north-south divide in the country: the employment rate among migrants who moved to the south is on average higher, while the unemployment rate is on average much higher in the north. Not only is this due to more employment opportunities in the southern states, but also because of the fact that most foreign highly skilled and educated workers usually migrate to the more industrialized ones where the majority of large corporations operate that offer better employment conditions and realization opportunities.
8. Labor costs and productivity
Once again, the east-west split remains visible when we look at labor costs and productivity. Studies show that a significant share of the East German human capital is not employed according to their formal level of education, which therefore reduces the feasible productivity level, as jobs for less qualified labor are given to workers with better qualifications. In other words, it is not worker characteristics but rather significantly different (i.e., more unfavorable) job characteristics in the East that explain these differences from the West. Academic research points to public infrastructure and agglomeration effects as the main culprits for this — mainly the absence of well-developed production networks.
Nearly 34 years after reunification, overall labor costs and gross salaries in the former East have not yet fully caught up with those in the West. In essence, Germans living in the old Bundesläner work less but earn between 10–40% more per hour worked. Apart from the differences in productivity levels, studies also show that a part of this wage gap can be explained by differences in establishment size, with the contribution of the gender composition of employees also being of considerable magnitude. As empirical evidence shows that these are persistent, predominantly structural factors, which are likely to remain stable over time as a result of locational conditions and firm characteristics, East German wages will probably not converge more materially toward West German levels in the years to come.
9. Labor costs and productivity
Aging populations are a problem for most European countries, especially in the context of their generous welfare states. The IMF projects in its 2024 Germany report that, from a comparative perspective, the German working-age population will most likely shrink much faster by the end of this decade than any other G7 nation or the EU as a whole. This is problematic for the labor market, for economic growth and for maintaining the country’s competitiveness in the future. It is also a crucial factor for policymaking and will continue to be one of the most contentious topics for decades to come. Regional data show that, once again, the East is the most significant driver of this problem. Both the shares of the population aged over 65 and the dependency ratios (i.e., those aged over 65 per 100 people aged 20–64) are relatively higher in Saxony-Anhalt, Thuringia, Saxony and Meckelnburg-Vorpommern. This picture is also substantially influenced by the fact that younger immigrant workers prefer to settle in the more developed and attractive for business and employment in Western states.
However, this relationship does not apply when it comes to poverty, which is more evenly spread across the former East and West. The highest poverty rates in 2022 were recorded in Bremen, followed by North-Rhine Westphalia, Hamburg, Thuringia, and Saarland. Most often the main determining factor for this is social background: people from socially disadvantaged families have significantly worse starting conditions and fewer resources than those from, for example, academic households. The state of Bremen has for years been the one with the highest poverty rates, mainly due to badly mismanaged structural changes in the economy there. It has lost most jobs in shipyards and steel companies which shaped its industrial strength.
10. Housing affordability has deteriorated
Germany is one of the countries in Europe with the lowest homeownership rates at below 50%. Since 2022, the cost of debt financing for home purchases has increased quite significantly and the decline in the prices of existing homes on offer has not been sufficient to compensate for that and for the previous decade of exorbitant price jumps across the country. Additionally, the negative development of real disposable income of German residents over the last several years has left household budgets significantly eroded for such major purchases. As a result, today the affordability of residential real estate is lower than just 5–6 years ago.
The picture is quite different in various regions — for instance, in some of the Eastern federal states (Thuringia, Saxony-Anhalt and most of Saxony) as well as Saarland, the north of Hesse, the west of Rhineland-Palatinate and the south of Lower Saxony, there are still areas where more affordable housing can be found. However, in the more industrial and business-dense south and west (Bavaria, Baden-Württemburg, the south of Hesse, the west of North-Rhine Westphalia) as well as Hamburg, Schleswig-Holstein, Berlin and most of Brandenburg and the north of Mecklenburg-Vorpommern, this has become a major problem. Three-quarters of the population basically live in areas where a middle-income household needs to spend more on housing than is generally considered affordable. A house or an apartment is no longer affordable in 51 of 63 large cities — and this problem has also spilled over into the surrounding areas.
Author: Nikolay
Founder of MoneyCraft
