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Technical Development, Competition from Low-Wage Economies and Low-Skilled Unemployment

Jacques Dreze and Henri Sneessens ()

No 1994036, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: The market position of less educated workers is weak and deteriorating, both in the US and in Europe, due in particular to technological development and growing competition from low-wage economies. In continental Europe, the resistance of relative wages of less-skilled workers has been an aggravating factor. Is it possible to reconcile labour costs low enough to promote full employment with reasonable incomes for low-skilled workers and proper incentives for economic efficiency? Constructive measures start with practical education and training, then go on to promote the demand and institutionalised supply of proximity services. Reliance on the price mechanism points towards measures reducing or eliminating the wedge between labour costs to employers and net marginal earnings of employees. A basicpolicy choice must be made between two avenues: minimum wages, unemployment benefits and employment subsidies concentrated on the low end of the wage scale; or flexible wages, no durable unemployment benefits, but a "participation income" issued on an individual basis to all adult members of the labour force. The merits of the second avenue hinge crucially on the prospects for implementing flexible wages. Union-wage and insider-outsider theories of wage determination cast doubts - but would need to be verified specifically for low skill levels. Short of making that choice, reductions or exemptions of employers' contributions to social security constitute a natural, urgently needed, first step. Such measures appear indispensable to the sustainability of free trade between countries with highly dissimilar levels of social protection.

Date: 1994-08-01
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