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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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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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  • David Howell & Friedrich Huebler, 2001. "Trends in Earnings Inequality and Unemployment Across the OECD: Labor Market Institutions and Simple Supply and Demand Stories," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2001-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:2001-02
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    File URL: http://www.economicpolicyresearch.org/scepa/publications/workingpapers/2001/cepa0123.pdf
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    1. Reid, Joseph D, Jr, 1976. " Sharecropping and Agricultural Uncertainty," Economic Development and Cultural Change, University of Chicago Press, vol. 24(3), pages 549-576, April.
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    3. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
    4. Muthoo, Abhinay, 1998. "Renegotiation-proof tenurial contracts as screening mechanisms," Journal of Development Economics, Elsevier, vol. 56(1), pages 1-26, June.
    5. Franklin Allen, 1982. "On Share Contracts and Screening," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 541-547, Autumn.
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    7. Basu, Kaushik, 1992. "Limited liability and the existence of share tenancy," Journal of Development Economics, Elsevier, vol. 38(1), pages 203-220, January.
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    Cited by:

    1. Carsten Ochsen, 2006. "Zukunft der Arbeit und Arbeit der Zukunft in Deutschland," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(2), pages 173-193, May.
    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.
    3. Levin-Waldman, Oren M., 2008. "Characteristics of cities that pass living wage ordinances: Are certain conditions more conducive than others?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2201-2213, December.

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    Keywords

    unemployment; earnings inequality; skills; institutions;

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