Fighting Unemployment: The Limits of Free Market Orthodoxy

Fighting Unemployment: The Limits of Free Market Orthodoxy

Fighting Unemployment: The Limits of Free Market Orthodoxy

Fighting Unemployment: The Limits of Free Market Orthodoxy


With much of Europe plagued by high levels of unemployment, it has become widely accepted that the culprit is labor market rigidity and that the prescription can only be labor market deregulation: lower wages, higher earnings inequality, greater decentralization in bargaining, less generous unemployment benefits, more hiring flexibility, and less job security. Fighting Unemployment critically assesses this free market orthodoxy. With cross-country statistical analyses and country case studies, leading economists from seven North American and European countries contend that this conventional wisdom has greatly exaggerated the extent to which the unemployment problem can be blamed on protective labor market institutions and that the case for dismantling the welfare state to fight unemployment rests more on free market ideology than on the empirical evidence. The larger message of this book is that fundamentally different labor market models - ranging from the 'American Model' to the much more regulated and coordinated Scandinavian systems - are compatible with low unemployment.


“But the emperor has nothing on at all,” cried the little child. And the people
began to whisper to one another what the child had said. “He hasn't got
anything on.”

Hans Christian Andersen

From about the mid-1980s through the 1990s, many policy analysts and economists concerned about excessively high unemployment in advanced European economies came to accept a particular view of the cause of joblessness—that it was the result largely of insufficient flexibility in the labor market in adapting to the changes brought about by technological progress and globalization. The inflexible culprits were welfare state and union policies intended to improve the economic position of lower-paid workers. The solution to joblessness was not higher growth rates (though everyone favors higher growth) but a range of changes to reduce the pay and economic security of lower-paid workers while lowering the taxes on higher-paid workers and deregulating business. In its 1994 Jobs Study, the Organization for Economic Cooperation and Development (OECD) encapsulated this perspective and called for market-oriented changes that many economies have indeed undertaken.

The evidence for the Jobs Study orthodoxy was and remains at best mixed. Many economists have known that the time-series and crosscountry data on which some proponents of the view relied was of dubious value. Indeed, in various Employment Outlook analyses post-1994, OECD economists themselves made clearer the fragility of the empirical support for some of the orthodox claims. Other analysts, usually country specialists, have known that the simple flexibility story does not explain the good or poor performance of their national economies. How else to account for the success in employment of Scandinavian countries, the failure of New Zealand, which massively revamped its economic system along orthodox lines, the superior performance of Ireland compared to the . . .

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