The common view that far-reaching labour market deregulation is the only remedy for high European unemployment is too simplistic. First, the evidence suggests that deeply rooted social customs are an important cause of wage rigidity, going beyond the legal constraints emphasised in the political debate. Second, in a second-best setting, a compressed wage structure may generate an ef®ciency gain. Finally, based on simple plots of the relation between labour market institutions and openness in OECD countries, I conclude that the globalisation of economic activity may lead to increased demand for various labour market rigidities.

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We document the results of a repeat survey, which updates Agell and Lundborg (1995), on wage rigidity in a sample of 159 Swedish manufacturing firms, conducted during the severe Swedish recession of the 1990s. It is found that not even a prolonged period of very high unemployment and quite low inflation softened workers' resistance to wage cuts. We discuss possible reasons for this. In addition, we report new evidence on underbidding, efficiency-wage mechanisms, and unemployment persistence.

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