Working Paper: NBER ID: w12581
Authors: Alberto Alesina; Joseph Zeira
Abstract: Many low skilled jobs have been substituted away for machines in Europe, or eliminated, much more so than in the US, while technological progress at the "top", i.e. at the high-tech sector, is faster in the US than in Europe. This paper suggests that the main difference between Europe and the US in this respect is their different labor market policies. European countries reduce wage flexibility and inequality through a host of labor market regulations, like binding minimum wage laws, permanent unemployment subsidies, firing costs, etc. Such policies create incentives to develop and adopt labor saving capital intensive technologies at the low end of the skill distribution. At the same time technical change in the US is more skill biased than in Europe, since American skilled wages are higher. In the last few years some partial labor market reforms in Europe may have started to slow down or even reverse this trend.
Keywords: Labor Market Policies; Technology Adoption; Wage Inequality
JEL Codes: O30; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market policies in Europe (J48) | Technology adoption (O33) |
| Binding minimum wage laws and unemployment benefits (J38) | Adoption of labor-saving technologies in unskilled sector (F66) |
| Higher wages in the US (J39) | Skill-biased technical change (J24) |
| Labor-saving technologies (O49) | Wage compression in Europe (J39) |
| Deregulation in the US (L51) | Rising wage inequality (J31) |
| Changes in labor market policies (J48) | Technological advancement (O00) |