Why full employment will remain an illusion

Involuntary unemployment (or inactivity) is usually attributed to a poorly functioning labour market and an inflexible price mechanism, caused, for example, by ‘sticky wages’ or a mandatory minimum wage. However, in most countries more than one in five persons of working-age is out of work, independent of the type of labour market institutions. Countries with a flexible labour market do not perform better than countries with a more ‘rigid’ labour market. In a standard economic analysis low- and high-skilled workers are assumed to be substitutes, implying that a reduction of the relative wage of the low-skilled vis-à-vis the high-skilled improves their employment opportunities. However, if low- and high-skilled workers are complementary, which is more plausible, reducing the relative wage of the low-skilled may have adverse effects. The real cause of persistent unemployment among specific vulnerable groups is that they are displaced by over-qualified workers from low-skilled jobs.