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Growing Income Inequalities pp 147–171Cite as

Palgrave Macmillan

Is there a Trade-off between Wage Inequality and Unemployment?

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Abstract

Up to the early 1980s, unemployment had been lower in most European countries than in the United States. From that point onwards, however, the evolution of unemployment diverged considerably, with unemployment falling in the US, whereas Europe witnessed a dramatic rise in unemployment. Coincidentally, wage inequality surged in the US but increased less dramatically, stabilized or even decreased in most (continental) European countries (see Chapter 1). Some economists explained this dual observation by an inequality-unemployment trade-off (henceforth IUT). The basic IUT story is that both the US and Europe have experienced an increase in the demand for high-skilled workers (relative to low-skilled workers), e.g., due to globalization and/or technological change. In the US, where labour markets are competitive, the rise in demand has resulted in higher inequality (skill premium). On the other hand, more egalitarian institutions in the EU that prevented wage adjustment have prompted increasing unemployment of the low-skilled (Krugman, 1994a).

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Authors
  1. Michel Dumont
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Editors and Affiliations

  1. University of Nantes, France

    Joël Hellier (Professor of Economics) (Professor of Economics)

  2. University of Lille 1, France

    Nathalie Chusseau (Associate Professor of Economics) (Associate Professor of Economics)

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© 2013 Michel Dumont

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Dumont, M. (2013). Is there a Trade-off between Wage Inequality and Unemployment?. In: Hellier, J., Chusseau, N. (eds) Growing Income Inequalities. Palgrave Macmillan, London. https://doi.org/10.1057/9781137283306_6

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