European Labour Markets
Not so different after all

The persistence of high unemployment in Europe is has puzzled policy-makers and economists throughout the 1980s. Many explanations have vested on comparisons of European with US and Japanese economic institutions, which apparently reveal supply- side maladies that account for substantially higher unemployment in many European countries. In Discussion Paper No. 134, Research Fellow Robert Gordon studies the interrelationships among productivity, wages and prices in the United States, Japan, and Europe. This is a revised version of a paper discussed by Gordon at a lunchtime meeting reported in Bulletin No. 8. Gordon's analysis is based on a new dataset that allows consistent comparisons of the economy as a whole and of its manufacturing and non-manufacturing sectors separately, for the United States, Japan and an aggregate of eleven European economies.

Gordon argues that the differences between Europe and the United States have been substantially exaggerated: Europe has neither greater nominal wage flexibility nor more rigid real wages than the United States. Gordon finds that US nominal wages are more rigid only in manufacturing, while the US aggregate and non- manufacturing sectors display as much nominal wage flexibility as Europe. These results undermine the case frequently made against demand expansion in Europe, namely that a uniquely vertical European aggregate supply curve means that a demand expansion would only raise inflation and would not increase output.

Gordon's analysis of real wage behaviour also yields new results. Consistent treatment of the income of the self-employed almost completely eliminates the apparent increase between the 1960s and 1980s in the wage gap indices for Japan and Europe. If anything real wages in Europe and Japan were too flexible, not too rigid, according to Gordon. Much of the increase in wage gap indices in Europe during 1968-70 and in Japan in 1973-4 can be attributed to autonomous wage push, and very little to a failure of real wages decelerate in response to the post-1972 productivity growth slowdown.

Gordon concludes that the response of productivity to changes in the real wage and to cyclical output fluctuations is roughly the same in the United States, Japan and Europe.


Productivity, Wages and Prices Inside and Outside of Manufacturing in the US, Japan and Europe
Robert J Gordon

Discussion Paper No. 134, October 1986 (IM/ATE)