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

By James K. Galbraith | Go to book overview

CHAPTER 8
Inequality and Unemployment in Europe
A QUESTION OF LEVELS

From 1974 to the present day, the specter of chronic mass unemployment has haunted the continent of Europe.1 Paradise—the jobless rates of 2 percent or so that were common in the 1950s and 1960s—was lost. In particular, paradise had been lost in comparison to the United States, which enjoyed lower unemployment on average, a much higher employment-to-population ratio, and moments of undisputed full employment. Some observers worried that Americans worked too much (Schor 2002); others view European social protections as worth the price in joblessness (Rifkin 2004, Mine 2011). Clearly something had gone wrong. Before 1970, Europeans had enjoyed full employment alongside their vaunted social model. After the oil shocks and the recession, they seemed to have faced, and made, an ugly choice. To economists, reducing the matter to the most elementary terms, Europe chose equality over efficiency, while America made the opposite choice.2

Within Europe, there were differences in unemployment rates, and this too needed explanation. The 1970s and early 1980s had been shocks to a previously successful system. But some countries had managed the shocks and adapted better than others. Why? Soon a line of theory developed, unifying the experience within Europe with the comparison to America. The United States, it was said, enjoyed labor-market or “real-wage” flexibility. In the United States, wage rates would adjust to match the demands of the new economy to the skills of the labor force, raising wages for the educated while lowering them for those who did not adapt. Increased inequality was one consequence, but fuller employment was another.3

Inside Europe, those countries that liberalized their labor markets—jettisoning job protections, cutting unemployment insurance, and weakening unions, thus emulating the United States and freeing wages to adjust to the new patterns of

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