The Limits of Wage Flexibility to Curing Unemployment

Richard Freeman

Oxford Review of Economic Policy, 1995, vol. 11, issue 1, 63-72

Abstract: This article takes a critical look at the view that wage flexibility, US-style, is the panacea to European unemployment problems. It shows that the wage flexibility in the US in the 1980s-1990s was associated with rising inequality and falling real wages for many workers, reduced rather than increased employment for the low-paid and less-skilled, whose wages fell, and arguably contributed to the growth of a significant criminal population. The proportion of American men incarcerated comes close to the proportion of European men long-term unemployed. The limits to wage flexibility in curing unemployment noted in the paper does not mean the reductions in pay may not, under some circumstances, raise employment, but rather that by themselves massive pay cuts for the low-paid are no cure to economic problems. Copyright 1995 by Oxford University Press.

Date: 1995
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