ABSTRACT
Books and papers attempting to explain high European unemployment have become a growth industry of their own. For almost every country in Europe, estimates are available that decompose the post-1970 rise in unemployment between demand and supply factors. Several ambitious studies attempt such a decomposition for a large number of countries (especially those of Bean et al. [1986], Bruno, Sachs [1981; 1985], Sachs [1979; 1983], and Bruno [1986]). Many others (in particular those published in Economica 1986) carry out this task for a single country. The consensus of this literature is that much of the rise in unemployment in Europe has been caused by supply factors, in the sense that the natural rate of unemployment or “NAIRU” has increased by half or more of the total percentage point rise in actual unemployment. There is much less consensus regarding the nature of the supply problem. Several papers by Bruno and Sachs blame an increase in the “wage gap”, that 98is, an index of labor’s income share, while other authors (especially Bean et al. [1986]) go beyond the endogenous wage gap to deeper structured factors, such as an increasing generosity of unemployment benefits, increasing skill and location mismatch in the labor market, “labor militancy” due to increased union power, an increasing tax “wedge”, an absence of “corporatism”, and other factors.
