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The trade-off between unemployment and wage inequality revisited

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  • Alena Bičáková

Abstract

The Krugman hypothesis attributes high wage inequality in the USA 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 article revisits the hypothesis to explain the labour market developments in France, the UK, and the USA in the 1990s. I estimate a labour supply and labour demand model with heterogeneous types of labour to analyse the effects of market forces and wage rigidity on changes in skill-group labour market outcomes. The results provide evidence in favor of the Krugman hypothesis when France is compared to the USA and the UK. I also find support for an extended version of the Krugman hypothesis, which suggests that when labour supply is sensitive to wages, there is a trade-off between unemployment on one hand and wage inequality and inactivity on the other.

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  • Alena Bičáková, 2014. "The trade-off between unemployment and wage inequality revisited," Oxford Economic Papers, Oxford University Press, vol. 66(4), pages 891-915.
    • Handle: RePEc:oup:oxecpp:v:66:y:2014:i:4:p:891-915.
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    Cited by:

    1. Joel HELLIER, 2021. "Globalization and Inequality in Advanced Economies: A Provisional Assessment," Working Papers 575, ECINEQ, Society for the Study of Economic Inequality.

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    More about this item

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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