Evaluating the European View that the Us Has No Unemployment Problem

Abstract

This study contrasts the labor market performance of the U.S. and OECD Europe in the 1980s and critically evaluates the view that the U.S. has generated more jobs because its labor market is more 'flexible'. The study finds that the greater employment expansion in the U.S. was associated with slower growth of real wages and productivity than in most of OECD Europe rather than with relatively costless flexibility. It also finds that while some aspects of relative wage flexibility, for instance in youth versus adult wages, helped limit U.S. unemployment, other aspects, for instance regional wage, show no greater flexibility in the U.S. than in the U.K., where labor markets are allegedly less flexible. Finally, the study argues that the disparate experiences of the U.K., with a relatively decentralized labor market, and Sweden, with a centralized wage-setting system, show that decentralized labor markets are neither necessary nor sufficient for employment-enhancing wage settlements.