Transatlantic Differences in Labour Markets: Changes in Wage and Non-Employment Structures in the 1980s and the 1990s

Abstract

Rising wage inequality in the United States and Britain and rising continental European unemployment have led to a popular view in the economics profession that these two phenomena are related to negative relative demand shocks against the unskilled, combined with flexible wages in the Anglo-Saxon countries, but wage rigidities in continental Europe (‘Krugman hypothesis’). This paper tests this hypothesis based on seven large person-level data sets for the 1980s and the 1990s. I use a more sophisticated categorization of low-skilled workers than previous studies, which exhibits differences between German workers with and without apprenticeship training, particularly in the 1980s. I find evidence for the Krugman hypothesis when Germany is compared with the United States. However, supply changes differ considerably between countries, with Britain experiencing enormous increases in skill supply explaining the relatively constant British skill premium in the 1990s.

The trade-off between unemployment and wage inequality revisited

“…Over a similar period, Fitzenberger and Garloff (2008) analyze unemployment and wage inequality in West Germany and find no support for the Krugman hypothesis when looking at the relationship between within-cell wage dispersion and unemployment by cells. Their findings, however, carry no implications for the validity of the Krugman hypothesis for between-group differences in relative wages and unemployment, which are the focus of Card et al (1999) and Puhani (2008) as well as our study (Fitzenberger and Garloff 2008).…”

“…Card, Kramarz, and Lemieux (1999) analyze a long-term change in the skill-specific wages and employment over the 1980s for France, Canada and the US, and reject the Krugman hypothesis when France and Canada are compared to the US. Puhani (2008), on the other hand, focuses on the relative wages and employment rates in the UK, the US, and Germany, and finds evidence in favor of the Krugman hypothesis for the 1980s and 1990s when Germany is compared to the US. Over a similar period, Fitzenberger and Garloff (2008) analyze unemployment and wage inequality in West Germany and find no support for the Krugman hypothesis when looking at the relationship between within-cell wage dispersion and unemployment by cells.…”

“…We follow the direction of Card et al (1999), our closest antecedent, and Puhani (2008), and formulate the Krugman hypothesis in terms of a simple model of labor supply and labor demand with heterogeneous labor. In contrast with the two previous studies, however, we estimate the model directly and base our test of the Krugman hypothesis on the estimates of its underlying parameters, rather than on correlations between relative net demand shocks and wage rigidities, as in Puhani (2008), or reduced form coefficients relating demand and supply shocks to relative wages and employment, as in Card et al (1999). We note that the results of the tests based on the correlations or reduced form estimation of the sensitivity of wages and employment to shocks may be also driven by cross-country differences in other underlying parameters of the model, such as elasticity of substitution between different skill-groups.…”

“…Both Card et al (1999) and Puhani (2008) focus on long-term changes (over a decade) in relative wages and employment, as a consequence of the skill-biased technological progress over the 1980s (also the 1990s for the latter study), using cross-sectional data. Instead, we consider year-to-year changes in wage and labor force status skill differentials using group-level panel data, which, we believe better fit both the pace of technological progress over 1990s and, in particular, the frequency of wage adjustments under wage rigidity.…”

Growing Income Inequalities in Advanced Countries

“…Both Krueger & Pischke (1997) for the US, and Card et al (1999) for the US, France and Canada found no impact of wage rigidity on the unemployment of the unskilled in relation to the unemployment of the skilled. In contrast, such a relation is found by Puhani (2008) who analyses and compares the cases of West Germany, Britain and the US. Assessing the impact of policies and institutions on employment and unemployment in OECD countries over the past decades, Bassanini & Duval (2006) find that high unemployment benefits and high tax wedges increase unemployment, whereas employment protection legislation has no significant impact and centralised and/or coordinated wage bargaining systems reduce unemployment.…”