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A Test of the ?Krugman Hypothesis? for the United States, Britain, and Western Germany

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Puhani, Patrick A.

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Abstract

Rising wage inequality in the U.S. and Britain (especially in the 1980s) and rising continental European unemployment (with rather stable wage inequality) have led to a popular view in the economics profession that these two phenomena are related to negative relative demand shocks against the unskilled in the industrialised world, combined with flexible wages in the Anglo-Saxon countries, but institutional rigidities in continental Europe (?Krugman hypothesis?). An alternative view stresses the importance of differing supply changes across countries. However, empirical evidence on these questions is sparse. Furthermore, existing international comparisons often rely on strong assumptions or compromise on data quality. This paper uses large data sets from the U.S., Britain, and western Germany to test the Krugman hypothesis for the 1990s, when unemployment in Germany increased (unlike in the U.S. and Britain, where it fell). British and German evidence is further backed up with alternative data sets for these countries. I find evidence for the Krugman hypothesis when Germany is compared to the U.S. However, supply changes differ considerably between countries, with especially Britain experiencing enormous increases in the relative supply of skills and a relatively constant skill premium. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-18.

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Date of creation: 2003
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Handle: RePEc:zbw:zewdip:1339

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Keywords: wage; earnings; unemployment; non-employment; rigidity; identification;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

References listed on IDEAS
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(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. Matthias Weiss & Alfred Garloff, 2005. "Skill Biased Technological Change and Endogenous Benefits: The Dynamics of Unemployment and Wage Inequality," MEA discussion paper series 05100, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
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  2. Christian Dustmann & Johannes Ludsteck & Uta Schönberg, 2007. "Revisiting the German Wage Structure," IZA Discussion Papers 2685, Institute for the Study of Labor (IZA). [Downloadable!]
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