Working and Earning under Different Rules: What the United States Can Learn from Labor Market Institutions in Other Developed Countries

By Freeman, Richard B. | NBER Reporter, Summer 1991 | Go to article overview

Working and Earning under Different Rules: What the United States Can Learn from Labor Market Institutions in Other Developed Countries


Freeman, Richard B., NBER Reporter


Working and Earning Under Different Rules: What the United States Can Learn from Labor Market Institutions in Other Developed Countries

Labor markets are the most idiosyncratic feature of developed countries, differing across national lines in more ways than markets for goods, finance, and the like. Some advanced capitalist countries are highly unionized; others are largely nonunion. Some countries rely on specific institutions to set pay: courts determine pay increases in Australia; the government extends collective bargaining agreements throughout the economy in Germany; in Japan, a large proportion of pay consists of bonuses, and the Shunto Offensive sets standards for wage increases throughout the economy. The United States, Canada, and the United Kingdom rely more on the free operation of markets.

There is a similar range of variation among countries in programs and institutions to aid those without work. Some countries have extensive income maintenance, social welfare, and labor market mobility and training programs, devoting considerable resources to redistributing income. Sweden is the typical example, but throughout Western Europe unemployment insurance systems have been more generous than the American system. The United States has relatively limited social welfare programs for most workers and for those without work, and relies to an unprecedented extent on the private charitable sector to deal with many social problems.

One of the most striking features of the 1980s was the substantial divergence in institutions and outcomes among developed western countries, often in ways that contravened the patterns of previous postwar history. The United States, which traditionally had higher rates of unemployment but relatively shorter durations of joblessness than Europe, experienced a "jobs explosion" with resultant lower unemployment than Western Europe. At the same time, the United States suffered rising inequality in earnings and poverty rates that eventually exceeded those in many other developed countries, and lost much of its lead in productivity and real earnings per person. The proportion of the work force organized in trade unions fell dramatically in the United States while remaining at higher levels in many other countries, including Canada. In earlier decades, the United States led the world in reducing working time toward the 40-hour week and extending vacation and holiday pay, but in the 1980s American workers put in more hours than did workers in Europe.

When unemployment rates rose in Europe in the early 1980s, most discussion of the difference between Western European and American labor markets focused on the advantages of labor arrangements of the U.S. style. The buzzword was "flexibility" of markets. Some analysts argued instead for "neocorporatist" arrangements, such as Sweden's, with central labor unions, employer confederations, and the state regulating the labor market. But most discussion focused on the problems of unemployment insurance systems that grant high benefits for years, long-term labor contracts that make firing workers difficult and hiring presumably more expensive, and so on. There was much concern with what Western Europe could learn from the flexible arrangements of the United States, but little thought as to what the United States might learn from European labor institutions.

The situation is the early 1990s looks quite different. There are rising inequality, high rates of poverty, particularly among children, homelessness, and related social problems in the United States. Unemployment rates, while still moderate, are now higher than those in West Germany. Widespread concern about the quality of the American labor force and American managerial practices has raised serious doubts about the way the United States has responded to the economic changes of the past decade or so. From an American perspective, the question is how foreign countries avoided some of our problems. …

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