Europe's Tattered Social Contract

Europeans defend their highly regulated and taxed labor markets by claiming that they produce less inequality in earnings than the more free market practices of the United States and the United Kingdom.

CHICAGO: Europeans defend their highly regulated and taxed labor markets by claiming that they produce less inequality in earnings than the more free market practices of the United States and the United Kingdom. They emphasize that, since the late 1970's, wage rates in America and Britain of the better educated and more skilled have risen sharply relative to those of other workers. By contrast, the skilled-unskilled wage gap of employed persons only increased modestly in Germany, France, and most other Western European countries.

But most European nations experienced a distressing change during the late 1980's and the 1990's in their employment situation: the number of persons without jobs has expanded greatly. In effect, European labor markets divide workers into "insiders" and "outsiders". Insiders have jobs, and are typically members of powerful trade unions. Their employment is protected by seniority and union rules, and also often by government regulations that limit layoffs. Since they face little competition from new entrants into the labor force and from others looking for work, wages of both skilled and unskilled insiders have risen over time at a good pace along with the growth in productivity.

Outsiders, on the other hand, cannot easily get good jobs, so their incomes come not from their productivity but mainly from social security and other welfare programs that are increasingly in financial trouble. Outsiders include the unemployed, and persons who exit from the labor force either because they despair of finding work, or are induced to leave by generous retirement and disability benefits.

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