The Trade-off Between Unemployment and Wage Inequality Revisited

Alena Bičáková

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: The Krugman hypothesis attributes high wage inequality in the US and high unemployment in continental Europe in the 1980s to the same negative change in the demand for the low skilled under different degrees of wage rigidity. This paper revisits the hypothesis in order to explain the labor market developments in France, the UK, and the US in the 1990s. We estimate a labor supply and labor demand model with heterogenous types of labor to analyze the effects of market forces and wage rigidity on changes in skill-group labor market outcomes. The results provide evidence in favor of the Krugman hypothesis when France is compared to the US and the UK. We also find support for an extended version of the Krugman hypothesis, which suggests that, when labor supply is sensitive to wages, there is a trade-off between unemployment on one hand, and wage inequality and inactivity on the other.

Keywords: Krugman hypothesis; wage rigidity; unemployment; inactivity (search for similar items in EconPapers)
JEL-codes: J21 J23 J31 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: The trade-off between unemployment and wage inequality revisited (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp502

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