The Unemployment Problem

Abstract

The paper reviews the unemployment problem in Europe. It shows that while there is a good deal of heterogeneity in European unemployment experience, a 'European model' of high and persistent unemployment characterizes many of the core continental economies, in contrast to the low unemployment experience of the USA. The explanation that this difference is due to a common skill-biased shock interacting with more rigid labour-market features in the European case is reviewed, as is the suggestion that the European experience is exceptional on account of the more stringent macro-environment created by devotion to tight monetary policies. The policy outlook is one in which strongly expansionary economic policies seem unlikely to be launched and most of the burden of fighting unemployment will be borne by labour-market reforms; the bad side-effects of these could be cushioned by resort to wage subsidies, supporting a 'European' bias in favour of equality. The 35-hour week is judged to be an unlikely remedy.