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Trends in Earnings Inequality and Unemployment Across the OECD: Labor Market Institutions and Simple Supply and Demand Stories

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Author Info
David Howell (CEPA, New School University)
Friedrich Huebler (CEPA, New School University)

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Abstract

Grounded in the standard supply and demand model, the conventional wisdom assumes a tradeoff between earnings inequality and unemployment, blames low skills for high earnings inequality in the U.S. and U.K., and attributes high European unemployment to institutional constraints. This paper finds little evidence of a tradeoff between earnings inequality and unemployment across OECD countries, and while welfare state institutions aimed at employment, unemployment, and wage protection matter a great deal for differences and changes in earnings inequality, they do not appear to be the main source of OECD employment problems. This evidence suggests a need to move beyond the policy implications of the simple textbook model. Specifically, returning to a more compressed wage distribution is not likely to create "European" levels of unemployment in the U.S., and greater earnings inequality is not likely to fix employment problems in Europe. Policy makers should give more credence to the view that the right kind of labor market institutions can further both egalitarian and efficiency goals.

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Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA Working Papers with number 2001-02.

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Length: 47 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:epa:cepawp:2001-02

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Related research
Keywords: unemployment; earnings inequality; skills; institutions;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David G. Blanchflower & Andrew Oswald, 1995. "International Wage Curves," NBER Chapters, in: Differences and Changes in Wage Structures, pages 145-174 National Bureau of Economic Research, Inc. [Downloadable!]
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  2. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November. [Downloadable!] (restricted)
  3. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  4. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
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  5. David Card & Francis Kramarz & Thomas Lemieux, 1996. "Changes in the Relative Structure of Wages and Employment: A Comparison of the United States, Canada, and France," NBER Working Papers 5487, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Alan B. Krueger & Lawrence H. Summers, 1987. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
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  8. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May. [Downloadable!] (restricted)
  9. Rebecca M. Blank, 1997. "No Easy Answers: Comparative Labor Market Problems in the United States Versus Europe," Macroeconomics 9711003, EconWPA. [Downloadable!]
  10. repec:fth:prinin:343 is not listed on IDEAS
  11. John Bound & George Johnson, 1995. "What are the causes of rising wage inequality in the United States?," Economic Policy Review, Federal Reserve Bank of New York, issue Jan, pages 9-17. [Downloadable!]
  12. Snower, Dennis J., 1999. "Causes of Changing Earnings Inequality," IZA Discussion Papers 29, Institute for the Study of Labor (IZA). [Downloadable!]
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  13. Siebert, Horst, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer. [Downloadable!] (restricted)
  14. Johnson, George E, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 41-54, Spring. [Downloadable!] (restricted)
  15. David R. Howell & Margaret Duncan & Bennett Harrison, 1998. "Low Wages in the US and High Unemployment in Europe: A Critical Assessment of the Conventional Wisdom," SCEPA Working Papers 1998-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School, revised Aug 1998. [Downloadable!]
  16. Freeman, Richard & Schettkat, Ronald, 2001. "Skill Compression, Wage Differentials, and Employment: Germany vs the US," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 582-603, July.
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  17. Richard B. Freeman, 2000. "Single Peaked Vs. Diversified Capitalism: The Relation Between Economic Institutions and Outcomes," NBER Working Papers 7556, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Schmitt & Jonathan Wadsworth, 2002. "Is the OECD Jobs Strategy Behind US and British Employment and Unemployment Success in the 1990s?," SCEPA Working Papers 2002-06, Schwartz Center for Economic Policy Analysis (SCEPA), The New School. [Downloadable!]
  2. Oren M Levin-Waldman, 2004. "Exploring the Demographic Factors Affecting Passage of Living Wage Ordinances," Working Papers wp88, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  3. Carsten Ochsen, 2004. "Zukunft der Arbeit und Arbeit der Zukunft in Deutschland," Thuenen-Series of Applied Economic Theory 45, University of Rostock, Institute of Economics, Germany. [Downloadable!]
    Other versions:
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