Asymmetric Growth Effects, Skill Mismatch and Unemployment Persistence

The paper consider two alternative explanations of the persistence of high unemployment rates in EC countries. One explanation is based on insider-outsider effects and the disenfranchisement of long-term unemployed workers ; the other explanation emphasizes the combined effects of asymmetric growth and relative wage rigidities which lead to skill mismatch. The issues is important because the two stories have quite different policy implications, although in both cases much emphasis will be given to the need for coordinated demand and supply policies. The two points of view are not easily distinguished empirically. The paper gives some evidence in favour of the skill mismatch story. A simple analytical framework is proposed to analyse the relationship between skill mismatch and aggregate equilibrium unemployment. This framework highlights the policy dilemma between income maintenance and economic efficiency. Twenty years after the first oil shock and the beginning of the current slow growth-high unemployment and the appropriate economic policy responses. The nature of the debate has progressively changed. The focus, which was initially on the consequences of demand vs supply shocks and the relative importance of the two, has now shifted on the mechanism of unemployment persistence. On the policy side, the emphasis is now on the need for more flexibility and for active (training and mobility) rather than passive (income maintenance) labour market policies. From this standpoint, the role and relative importance of structural phenomena remain a critical issue. We emphazise in this paper the asymmetric effects of growth on the demand for high-and low-skilled workers. This asymmetry may result from technological changes, output demand shifts (deindustrialization) and/or the increasing importance of newly industrial country. Asymmetric growth plus relative wage rigidities inevitably leads to structural maladjustment and may contribute to explain unemployment persistence in Europe. The fear is furthermore that, even with flexible real wages and full-employment, the American and European economy could in the future be unable to provide sufficient " middle-class jobs " (jobs that can provide a decent standard of living to low-skilled full-time workers). Hence the policy dilemma discussed in Drèze-Sneessens (1994) , income maintenance vs economic efficiency. We briefly review in section 1 the different factors that may lead to asymmetric growth (biased technological change, deindustrialisation and competition from low-wage countries). Our main objective however is not to evaluate the relative importance of each of these factors, but rather to look at the aggregate consequences of asymmetric growth and analyse to what extent such an asymmetry might be held responsible for the current situation in Europe. Section 2 briefly compares and evaluates the relative merits of two competing explanations of unemployment persistence, structural (skill) mismatch vs hysteresis via disenfranchisement of long-term unemployed workers. A simple analytical framework is proposed in section 3 to analyze relationship between skill mismatch and equilibrium unemployment ; this section also summarizes the empirical results obtained on French data over the period 1962-1989. Economic policy implications are discussed in section 4.