The trade-off between unemployment and wage inequality revisited

0441233 - NHU-C 2015 RIV GB eng J - Journal Article
Bičáková, Alena
The trade-off between unemployment and wage inequality revisited.
Oxford Economic Papers-New Series. Roč. 66, č. 4 (2014), s. 891-915. ISSN 0030-7653. E-ISSN 1464-3812
Institutional support: PRVOUK-P23
Keywords : unemployment * wage inequality * labor supply
Subject RIV: AH - Economics
Impact factor: 0.846, year: 2014

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.
Permanent Link: http://hdl.handle.net/11104/0244263