Inequality and Labour-Market Performance: A Survey Beyond an Elusive Trade-Off

Abstract

In this paper we assess the evolution of employment and wage inequality in Europe and the US labour markets over the past two decades. We find that the salient trends in wage structures are more complicated than implied by the so-called “unified theory.” Furthermore there is no clear cross-country correlation between changes in wage and employment rates by skill categories. This brings us to consider in detail other factors mentioned in the literature as contributing to poor labour-market performance in Europe. We find that strong unions, a factor often believed to bring about wage compression and poor labour-market performance, are not necessarily associated with the latter when bargaining is sufficiently coordinated. We also find that successful welfare reforms can bring about considerable improvements in performance without much impact on inequality. Finally we point out that the role of industrial structure and of the housing sector cannot be neglected when explaining cross-country labour-market performance.

Keywords: Unemployment, Wage Inequality, Labour and Product-Market Institutions

JEL Classification: E24, P17, P52