James K. Galbraith and Deepshikha RoyChowdhury’s paper casts doubt on the most current explanations of high unemployment in Europe. These views point to the institutional rigidity of national labor markets or an inflexible wage structure in Europe as principal causes of high unemployment, and to labor market ‘flexibilization’ as the cure. Using data on European wages from 1980 to 2005 the authors find that there is variability in the European wage structure, and that the variations are mainly associated with differing rates of change of investment, consumption and overall GDP growth between countries. The notice that there appears to be no cases where falling relative wages led to higher employment, as the labor market flexibilization hypothesis would predict.
Galbraith, James K., and Deepshikha RoyChowdhury. 2007. The European Wage Structure, 1980- 2005: How much flexibility do we have?. UTIP Working Paper No. 41. Austin: University of Texas Inequality Project.
Full text: utip.gov.utexas.edu/papers/utip_41.pdf