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

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.