Effective Demand and
The two issues that dominated the employment experience of the major industrial countries between the 1970s and the 1990s were the common rise in unemployment they all experienced; and the diversity in the scale and content of that rise between the economies of Western Europe, on the one hand, and those of Japan and North America (particularly the United States), on the other. A satisfactory explanation of this outstanding feature of the macroeconomic performance of the industrial economies must explain both.1
Conventional approaches sought to explain the differential employment outcomes of Europe and North America primarily in terms of imperfections in the operation of labor markets. The clear implication of such explanations was that if the labor-market imperfections had been absent, or less pronounced, then the economy would have converged to full employment.2 But these old-fashioned explanations now seem unconvincing. While a wide variety of factors affected the macroeconomic landscape—including the age structure of the population, government employment schemes, labor hoarding, and employment in the black economy—the most important determinant of the common experience of growing unemployment was the slowdown in the growth of aggregate demand that occurred throughout the major industrialized economies in the 1980s. Furthermore, it seems that the differential experience of the major industrial countries in this period was attributable to the interaction between changes in the growth of effective demand and national labor-market structures, rather than imperfections per se.