ABSTRACT

Western Europe suffers from too many labor market rigidities, from excessively generous unemployment insurance, high employment protection, and high minimum wages. It is essential that countries putting in place new institutions do not commit the same mistakes. That labor market institutions developed in response to market failures surely does not imply that the institutions we have today are optimal in any sense. Quarterly rates of job creation and destruction are substantially lower in Portugal than in the US. The difference goes away when looking at annual rates. Flows of workers are substantially lower (less than half) in Portugal than in the United States. If unemployment rates are similar, but flows of workers are lower, then it follows that unemployment durations are longer in Europe. For an individual, being unemployed means something very different on both sides of the Atlantic.