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The Trade-off Between Unemployment and Wage Inequality Revisited

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  • Alena Bicakova

Abstract

The Krugman hypothesis attributes high wage inequality in the US and high unemployment in continental Europe in the 1980s to the same negative change in the demand for the low skilled under different degrees of wage rigidity. This paper revisits the hypothesis in order to explain the labor market developments in France, the UK, and the US in the 1990s. We estimate a labor supply and labor demand model with heterogenous types of labor to analyze the effects of market forces and wage rigidity on changes in skill-group labor market outcomes. The results provide evidence in favor of the Krugman hypothesis when France is compared to the US and the UK. We also find support for an extended version of the Krugman hypothesis, which suggests that, when labor supply is sensitive to wages, there is a trade-off between unemployment on one hand, and wage inequality and inactivity on the other.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp502.

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Date of creation: Jan 2014
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Handle: RePEc:cer:papers:wp502

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Keywords: Krugman hypothesis; wage rigidity; unemployment; inactivity;

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  1. Avouyi-Dovi, Sanvi & Fougère, Denis & Gautier, Erwan, 2011. "Wage Rigidity, Collective Bargaining and the Minimum Wage: Evidence from French Agreement Data," IZA Discussion Papers 5835, Institute for the Study of Labor (IZA).
  2. Giuseppe Bertola & Francine D. Blau & Lawrence M. Kahn, 2002. "Labor Market Institutions and Demographic Employment Patterns," NBER Working Papers 9043, National Bureau of Economic Research, Inc.
  3. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
  4. Sarantis, Nicholas C., 1981. "Employment, labor supply and real wages in market disequilibrium," Journal of Macroeconomics, Elsevier, Elsevier, vol. 3(3), pages 335-354.
  5. Claudia Olivetti & Barbara Petrongolo, 2005. "Unequal Pay or Unequal employment? A Cross-Country Analysis of Gender Gaps," CEP Discussion Papers, Centre for Economic Performance, LSE dp0711, Centre for Economic Performance, LSE.
  6. Alena Bicakova, 2006. "Market vs. Institutions: The Trade-off Between Unemployment and Wage Inequality Revisited," Economics Working Papers, European University Institute ECO2006/31, European University Institute.
  7. Mark P. Moore & Priya Ranjan, 2005. "Globalisation vs Skill-Biased Technological Change: Implications for Unemployment and Wage Inequality," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(503), pages 391-422, 04.
  8. Alicia Adsera, 2005. "Vanishing Children: From High Unemployment to Low Fertility in Developed Countries," American Economic Review, American Economic Association, American Economic Association, vol. 95(2), pages 189-193, May.
  9. Gregg, Paul & Manning, Alan, 1997. "Skill-biassed change, unemployment and wage inequality," European Economic Review, Elsevier, Elsevier, vol. 41(6), pages 1173-1200, June.
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