The dismal development on continental European labor markets along with the lack
seriousefforts to fight unemployment continues
be puzzling. While the U.S. is enjoying the fruits
its longest post World War II expansion with record low unemployment rates and almostprice level stability, continental Europe and in particular its two flagship countries, France andGermany, seem to be stuck
inexorable upward trend in unemployment rates. Althoughthis European unemployment phenomenon has been widely disussed in the literature, it remains far from being resolved.In fact, additional puzzles keep popping
It has recently been noted that labor shares inGermany and France have been falling almost continuously since the early eighties after having risen sharply
the wake of the two oil price shocks in the seventies.! Although there iswidespread agreement that rising unemployment was largely due to classical reasons, thesefalling labor shares put classical explanations
rising unemployment based on wages growing faster than productivity into doubt. However, Keynesian explanations, which have recently enjoyed a rebound in popularity2, even fare worse upon closer inspection. The stronggrowth
capital intensities, capital coefficients and profit rates are evidence against the importance of high real interest rates and the associated alleged lack
aggregate demand inexplaining rising unemployment. Furthermore, the outward shifts
the Beveridge curve and
the Qkun curve along with the rise in the NAIRU (NAWRUY over time indicate that demand policy is not the adequate policy instrument for fighting continental European unemployment.
explanatory power of the two standard theories
unemployment has surely contributed
the current fashion of tracing rising unemployment in Europe back to changes inthe structure
argued that globalization and technological progress biased in favor
qualified workers lead
fundamental changes in the structure
labor demand. The service sector grows while the industrial sector shrinks and labor demand
See e.g. Blanchard (1997), BentiIola and Saint-Paul (1998), Rowthom (1999) and Caballero and Hammour (1997).
See e.g. ModigIiani et al. (1998).
Non-Accelerating (Wage-) Inflation Rate
See Fehn (1997). The OECD estimates that
due to cyclical factors; seeOECD (1998,173-174).
See Krugman (1994), AlogoskoufIs et