Inequality and Unemployment in Europe: The American Cure

Abstract

In this paper we show that inequality and unemployment are related positively across the European continent, within countries, between countries and through time. This contradicts the often-repeated view that unemployment in Europe is attributable to rigid wage structures, high minimum wages and generous social welfare systems. In fact, countries that possess the low inequality such systems produce experience less unemployment than those that do not. Moreover, large inter-country inequalities across Europe aggravate the continental unemployment problem. There is no paradox in low American unemployment. It stems in part from that country's continent-wide programs of redistribution, including the Social Security System, the Earned Income Tax Credit, the federal minimum wage, and a uniform regime of monetary policy geared toward full employment, all of which reduce inter-regional inequality and all of which we recommend for adoption by the European Union.

JEL Classification: J31, J68