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Do affluent countries face an income-jobs tradeoff?

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  • Kenworthy, Lane

Abstract

A commonly-held view suggests that affluent nations face a tradeoff between incomes and jobs. According to this view, in the United States pay for workers at the bottom of the earnings distribution (relative to those in the middle) is very low and government unemployment-related benefits (the replacement rate) are stingy, but this facilitates the creation of lots of new jobs and encourages such individuals to take those jobs. The result is a high rate of employment and low unemployment. In much of Western Europe relative pay levels are higher for those at the bottom and benefits are more generous, but this is said to discourage job creation and to reduce the willingness of the unemployed to accept low-wage jobs. The consequence is low employment and high unemployment. I undertake a comparative assessment of this tradeoff view, based on pooled cross-section time-series analyses of 14 OECD countries in the 1980s and 1990s. The findings suggest that greater pay equality and a higher replacement rate do reduce employment growth in low-productivity private-sector service industries and in the economy as a whole. However, these effects are relatively weak. The results point to a variety of viable options for countries wishing to maintain or move toward a desirable combination of jobs and equality.

Suggested Citation

  • Kenworthy, Lane, 2002. "Do affluent countries face an income-jobs tradeoff?," MPIfG Discussion Paper 01/10, Max Planck Institute for the Study of Societies.
  • Handle: RePEc:zbw:mpifgd:0110
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    6. David R. Howell, 2002. "Increasing Earnings Inequality and Unemployment in Developed Countries: Markets, Institutions and the "Unified Theory"," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
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    Cited by:

    1. Oesch, Daniel, 2009. "Explaining high unemployment among low-skilled workers: Evidence from 21 European and Anglo-Saxon countries, 1991-2006," MPRA Paper 21041, University Library of Munich, Germany.
    2. Oesch, Daniel & Rodriguez Menes, Jorge, 2010. "Upgrading or polarization? Occupational change in Britain, Germany, Spain and Switzerland, 1990-2008," MPRA Paper 21040, University Library of Munich, Germany.
    3. Ganghof, Steffen, 2001. "Global markets, national tax systems, and domestic politics: Rebalancing efficiency and equity in open states' income taxation," MPIfG Discussion Paper 01/9, Max Planck Institute for the Study of Societies.
    4. Lane Kenworthy & Jonas Pontusson, 2005. "Rising Inequality and the Politics of Redistribution in Affluent Countries," LIS Working papers 400, LIS Cross-National Data Center in Luxembourg.
    5. Caroline Dewilde, 2008. "Individual and institutional determinants of multidimensional poverty: A European comparison," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 86(2), pages 233-256, April.
    6. Destefanis, Sergio & Mastromatteo, Giuseppe, 2010. "Wage Inequality and Labour-market Performance. A Role for Corporate Social Responsibility - Disuguaglianza salariale e performance del mercato del lavoro," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 63(1), pages 91-120.

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