Inequality and Instability: A Study of the World Economy Just before the Great Crisis

By James K. Galbraith | Go to book overview

CHAPTER 9
European Wages and the Flexibility Thesis

In the last chapter, we examined the relationship between wage inequality—a proxy for “flexibility”—and unemployment, to discover that, contrary to the theoretical argument and insistent policy prescription of the European mainstream, the actual evidence shows wage equality is good for employment. This is true at every level of analysis: regional, national, and continental. That is, egalitarian regions within Europe have less unemployment than highly unequal regions. Egalitarian countries within Europe have less unemployment than highly unequal countries. And—over the period under study—the United States had less pay inequality than Europe taken as a continental whole, and also less unemployment. Moreover, the analysis suggests that as Europe expanded and integrated, the continental inequalities became more relevant, adding upward pressure to unemployment.

This chapter takes up the issue of wage flexibility and rigidity in Europe from another angle and with a different technique.1 The question asked here is, When we consider Europe as a whole, how much wage flexibility do we observe in fact? The shift here is from a static mode of observation to a dynamic one: in this chapter, we will be concerned with assessing the degree to which relative wages inside Europe are actually capable of changing over time. This is important because although part of the “rigidities” argument focuses on the allegedly egalitarian structure of European wages, another part of it focuses on the problem of “sclerosis,” the ability or inability to change in response to change in technology and associated patterns of labor demand.

As discussed earlier, unemployment in Europe was practically nonexistent until the oil crises of the 1970s; since that time it has risen episodically but persistently and has become an intractable problem and a leading policy concern. A small group of Keynesians (Palley 2001, 2004; Arestis and Sawyer 2006) continue to insist that the blame lies with the tight fiscal and monetary policies, but the dominant view places responsibility on a rigid structure of

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