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Low Wages in the US and High Unemployment in Europe: A Critical Assessment of the Conventional Wisdom

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Abstract

Measured by changes in real wages, earnings inequality and unemployment, the economic position of lower skilled workers has declined sharply over the past two decades across the developed countries of the OECD. In this paper we survey a wide-ranging empirical literature for evidence bearing on the Unified Theory - the popular idea that strong shifts in demand away from low-skilled workers, caused mainly by computerization and related forms of advanced technology, explain both the declining wages of low skilled workers in the "flexible" labor market of the United States and high and rising unemployment in "rigid" European labor markets. On the U.S. side, we find little evidence of large or accelerating skill-biased demand shifts after the early 1980s as measured by standard indices of the skill-intensity of employment. This is significant since most of the impact of computerization on the organization and skill requirements in the workplace has occurred in precisely this later period. There is also little unambiguous evidence of a close link between computerization and relative wage change. Nor do we find that the conventional skill-biased demand-shift story offers a compelling explanation for the rise in unemployment rates experienced by most European countries. Across the OECD, rising low-skilled unemployment does not appear to drive much of the increase in the overall rate; measures of wage rigidity are not closely correlated with unemployment problems; and no clear empirical link has been established between the recent rise in unemployment and the presence of strong wage-setting institutions and social policies. If the empirical basis of the Unified Theory is so shallow, what accounts for the broad consensus in its favor? We speculate that at least part of the answer lies in the natural attraction of a simple story, particularly one that is so consistent with the textbook demand-supply model of the labor market. We conclude with some conjectures on the direction an alternative account might take that places less weight on technology driven demand shifts and greater weight on the effects of fundamental political, institutional and structural changes.

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Bibliographic Info

Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. with number 1998-01.

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Length: 89 pages
Date of creation: Feb 1998
Date of revision: Aug 1998
Handle: RePEc:epa:cepawp:1998-01

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Keywords: earnings inequality; unemployment; unified theory; skills; technology; institutions;

References

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  1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198284345, October.
  2. Karoly, Lynn A, 1992. "Changes in the Distribution of Individual Earnings in the United States: 1967-1986," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 107-15, February.
  3. Alan B. Krueger & Jorn-Steffen Pischke, 1997. "Observations and Conjectures on the U.S. Employment Miracle," NBER Working Papers 6146, National Bureau of Economic Research, Inc.
  4. E Berman & J Bound & Stephen Machin, 1997. "Implications of Skill-Biased Technological Change: International Evidence," CEP Discussion Papers, Centre for Economic Performance, LSE dp0367, Centre for Economic Performance, LSE.
  5. George E. Johnson, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 41-54, Spring.
  6. David Marsden, 1995. "Management Practices and Unemployment," CEP Discussion Papers, Centre for Economic Performance, LSE dp0241, Centre for Economic Performance, LSE.
  7. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026202375x, December.
  8. Bruno, Michael, 1986. "Aggregate Supply and Demand Factors in OECD Unemployment: An Update," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 53(210(S)), pages S35-52, Supplemen.
  9. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number brun85-1.
  10. Jeffrey H. Keefe, 1991. "Numerically controlled machine tools and worker skills," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 44(3), pages 503-519, April.
  11. Blondal, Sveinbjorn & Pearson, Mark, 1995. "Unemployment and Other Non-employment Benefits," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 11(1), pages 136-69, Spring.
  12. Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(1), pages 35-78, February.
  13. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed The Labor Market?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(4), pages 1169-1213, November.
  14. Peter Cappelli, 1993. "Are skill requirements rising? Evidence from production and clerical jobs," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(3), pages 515-530, April.
  15. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, American Economic Association, vol. 74(2), pages 350-55, May.
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Cited by:
  1. James Crotty, 2000. "Structural Contradictions of the Global Neoliberal Regime," Published Studies, Political Economy Research Institute, University of Massachusetts at Amherst ps6, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Saint-Paul, Gilles, 2007. "Knowledge hierarchies in the labor market," Journal of Economic Theory, Elsevier, Elsevier, vol. 137(1), pages 104-126, November.

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