IDEAS home Printed from https://ideas.repec.org/p/zbw/zewdip/1339.html
   My bibliography  Save this paper

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

Author

Listed:
  • Puhani, Patrick A.

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.

Suggested Citation

  • Puhani, Patrick A., 2003. "A Test of the 'Krugman Hypothesis' for the United States, Britain, and Western Germany," ZEW Discussion Papers 03-18, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:1339
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/23965/1/dp0318.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John P. Haisken-DeNew & Christoph M. Schmidt, 2000. "Interindustry and Interregion Differentials: Mechanics and Interpretation," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 516-521, August.
    2. Daron Acemoglu, 2003. "Cross-Country Inequality Trends," Economic Journal, Royal Economic Society, vol. 113(485), pages 121-149, February.
    3. Machin, Stephen, 1996. "Wage Inequality in the UK," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(1), pages 47-64, Spring.
    4. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(1), pages 35-78.
    5. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 705-746.
    6. Lawrence M. Kahn, 2000. "Wage Inequality, Collective Bargaining, And Relative Employment From 1985 To 1994: Evidence From Fifteen Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 564-579, November.
    7. Daron Acemoglu, 1999. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," American Economic Review, American Economic Association, vol. 89(5), pages 1259-1278, December.
    8. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    9. Freeman, Richard & Schettkat, Ronald, 2001. "Skill Compression, Wage Differentials, and Employment: Germany vs the US," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 582-603, July.
    10. John Van Reenen, 2004. "Active Labor Market Policies and the British New Deal for the Young Unemployed in Context," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980–2000, pages 461-496, National Bureau of Economic Research, Inc.
    11. Alan B. Krueger & Jorn-Steffen Pischke, 1997. "Observations and Conjectures on the U.S. Employment Miracle," NBER Working Papers 6146, National Bureau of Economic Research, Inc.
    12. Nickell, Stephen & Bell, Brian, 1996. "Changes in the Distribution of Wages and Unemployment in OECD Countries," American Economic Review, American Economic Association, vol. 86(2), pages 302-308, May.
    13. Eli Bekman & John Bound & Stephen Machin, 1998. "Implications of Skill-Biased Technological Change: International Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1245-1279.
    14. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555, Elsevier.
    15. Angrist, Joshua D, 1995. "The Economic Returns to Schooling in the West Bank and Gaza Strip," American Economic Review, American Economic Association, vol. 85(5), pages 1065-1087, December.
    16. Leung, Siu Fai & Yu, Shihti, 1996. "On the choice between sample selection and two-part models," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 197-229.
    17. Puhani, Patrick A., 2001. "Wage Rigidities in Western Germany? Microeconometric Evidence from the 1990s," IZA Discussion Papers 334, Institute of Labor Economics (IZA).
    18. John Van Reenen, 2001. "No more skivvy schemes? Active labour market policies and the British New Deal for the young unemployed in context," IFS Working Papers W01/09, Institute for Fiscal Studies.
    19. Marco Manacorda & Barbara Petrongolo, 1999. "Skill Mismatch and Unemployment in OECD Countries Marco Manacorda," Economica, London School of Economics and Political Science, vol. 66(262), pages 181-207, May.
    20. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
    21. repec:sae:niesru:v:166:y::i:1:p:87-96 is not listed on IDEAS
    22. David Card & Francis Kramarz & Thomas Lemieux, 1999. "Changes in the Relative Structure of Wages and Employment: A Comparison of the United States, Canada, and France," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 843-877, August.
    23. Jaeger, David A, 1997. "Reconciling the Old and New Census Bureau Education Questions: Recommendations for Researchers," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 300-309, July.
    24. Peter Gottschalk & Mary Joyce, 1998. "Cross-National Differences In The Rise In Earnings Inequality: Market And Institutional Factors," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 489-502, November.
    25. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
    26. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64, Elsevier.
    27. Stephen Machin, 1998. "Recent shifts in wage inequality and the wage returns to education in Britain," National Institute Economic Review, National Institute of Economic and Social Research, vol. 166(1), pages 87-96, October.
    28. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
    29. Stephen Machin & John Van Reenen, 1998. "Technology and Changes in Skill Structure: Evidence from Seven OECD Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1215-1244.
    30. Barry T. Hirsch & Edward J. Schumacher, 2004. "Match Bias in Wage Gap Estimates Due to Earnings Imputation," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 689-722, July.
    31. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    32. Freeman, Richard B., 1987. "Demand for education," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 6, pages 357-386, Elsevier.
    33. Fitzenberger, Bernd & Franz, Wolfgang, 2000. "Jobs. Jobs? Jobs! Orientierungshilfen für den Weg zu mehr Beschäftigung," ZEW Discussion Papers 00-49, ZEW - Leibniz Centre for European Economic Research.
    34. Rebecca M. Blank, 2002. "Evaluating Welfare Reform in the United States," Journal of Economic Literature, American Economic Association, vol. 40(4), pages 1105-1166, December.
    35. Paul R. Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
    36. Marco Manacorda, 2004. "Can the Scala Mobile Explain the Fall and Rise of Earnings Inequality in Italy? A Semiparametric Analysis, 19771993," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 585-614, July.
    37. Blau, Francine D & Kahn, Lawrence M, 1996. "International Differences in Male Wage Inequality: Institutions versus Market Forces," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 791-836, August.
    38. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed the Labor Market?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1169-1213.
    39. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 11(1), pages 40-62, Spring.
    40. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Dustmann & Johannes Ludsteck & Uta Schönberg, 2009. "Revisiting the German Wage Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(2), pages 843-881.
    2. Olivier Pierrard & Henri Sneessens, 2004. "The European Labour Markets - Aggregate Unemployment and Relative Wage Rigidities," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(01), pages 19-23, October.
    3. Patrick Puhani, 2004. "The European Labour Markets - Differences in Labour Markets Across the Atlantic," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 5(1), pages 12-18, October.
    4. Bellmann, Lutz & Gartner, Hermann, 2003. "Fakten zur Entwicklung der qualifikatorischen und sektoralen Lohnstruktur (Facts on the development of the qualification-related and sectoral wage structure)," Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 36(4), pages 493-508.
    5. Patrick A. Puhani, 2003. "Relative Demand Shocks and Relative Wage Rigidities During the Rise and Fall of Swiss Unemployment," Kyklos, Wiley Blackwell, vol. 56(4), pages 541-562, November.
    6. Bellmann, Lutz & Gartner, Hermann, 2003. "Fakten zur Entwicklung der qualifikatorischen und sektoralen Lohnstruktur (Facts on the development of the qualification-related and sectoral wage structure)," Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 36(4), pages 493-508.
    7. Wolf‐Heimo Grieben, 2005. "A Schumpeterian North–South Growth Model of Trade and Wage Inequality," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 106-128, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Puhani Patrick A., 2008. "Transatlantic Differences in Labour Markets: Changes in Wage and Non-Employment Structures in the 1980s and the 1990s," German Economic Review, De Gruyter, vol. 9(3), pages 312-338, August.
    2. Daron Acemoglu, 2003. "Cross-Country Inequality Trends," Economic Journal, Royal Economic Society, vol. 113(485), pages 121-149, February.
    3. Patrick A. Puhani, 2002. "The Rise and Fall of Swiss Unemployment - Relative Demand Shocks, Wage Rigidities, and Temporary Immigrants," University of St. Gallen Department of Economics working paper series 2002 2002-29, Department of Economics, University of St. Gallen.
    4. Patrick A. Puhani, 2005. "Relative Supply and Demand for Skills in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(IV), pages 555-584, December.
    5. Patrick A. Puhani, 2008. "Transatlantic Differences in Labour Markets: Changes in Wage and Non-Employment Structures in the 1980s and the 1990s," German Economic Review, Verein für Socialpolitik, vol. 9, pages 312-338, August.
    6. Ryosuke Okazawa, 2013. "Skill-biased technical change, educational choice, and labor market polarization: the U.S. versus Europe," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 11(3), pages 321-342, September.
    7. Puhani, Patrick, 2003. "The Rise and Fall of Swiss Unemployment," CEPR Discussion Papers 3828, C.E.P.R. Discussion Papers.
    8. Puhani, Patrick A., 2001. "Wage rigidities in Western Germany? Microeconometric evidence from the 1990s," ZEW Discussion Papers 01-36, ZEW - Leibniz Centre for European Economic Research.
    9. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U. S. Wage Inequality: Re-Assessing the Revisionists," Harvard Institute of Economic Research Working Papers 2095, Harvard - Institute of Economic Research.
    10. Puhani Patrick A., 2008. "Relative Demand and Supply of Skills and Wage Rigidity in the United States, Britain, and Western Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 228(5-6), pages 573-585, October.
    11. Jeff Borland, 2000. "Economic Explanations of Earnings Distribution Trends in the International Literature and Application to New Zealand," Treasury Working Paper Series 00/16, New Zealand Treasury.
    12. Batyra, Anna & Sneessens, Henri R., 2010. "Selective reductions in labor taxation: Labor market adjustments and macroeconomic performance," Journal of Policy Modeling, Elsevier, vol. 32(4), pages 531-543, July.
    13. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
    14. Lex Borghans & Bas ter Weel, 2008. "Understanding the Technology of Computer Technology Diffusion: Explaining Computer Adoption Patterns and Implications for the Wage Structure," Journal of Income Distribution, Ad libros publications inc., vol. 17(3-4), pages 37-70, September.
    15. Sonja Jovicic, 2016. "Wage inequality, skill inequality, and employment: evidence and policy lessons from PIAAC," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-26, December.
    16. Sunde, Uwe, 2001. "Human Capital Accumulation, Education and Earnings Inequality," IZA Discussion Papers 310, Institute of Labor Economics (IZA).
    17. Arnaud Dupuy & Lex Borghans, 2005. "Supply and demand, allocation and wage inequality: an international comparison," Applied Economics, Taylor & Francis Journals, vol. 37(9), pages 1073-1088.
    18. Lex Borghans & Bas ter Weel, 2008. "Understanding the Technology of Computer Technology Diffusion: Explaining Computer Adoption Patterns and Implications for the Wage Structure," Journal of Income Distribution, Ad libros publications inc., vol. 17(3-4), pages 37-70, September.
    19. David H. Autor & Frank Levy & Richard J. Murnane, 2003. "The Skill Content of Recent Technological Change: An Empirical Exploration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1279-1333.
    20. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.

    More about this item

    Keywords

    wage; earnings; unemployment; non-employment; rigidity; identification;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:1339. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/zemande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.