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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.

Suggested Citation

  • Alena Bicakova, 2014. "The Trade-off Between Unemployment and Wage Inequality Revisited," CERGE-EI Working Papers wp502, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp502
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    References listed on IDEAS

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    Cited by:

    1. Joel HELLIER, 2021. "Globalization and Inequality in Advanced Economies: A Provisional Assessment," Working Papers 575, ECINEQ, Society for the Study of Economic Inequality.

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    Keywords

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    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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