No Easy Answers

High unemployment rates and increasing terms of unemployment have persisted in western European
countries for the past 20 years. These problems have been explained as resulting from inflexibility in the labor
market created by such policies as protective labor market regulation and generous social assistance. The lower
rates and shorter duration of unemployment in the United States were thought to result from greater labor
market flexibility.

On the basis of this analysis, European nations enacted changes, such as weakening
regulations, to increase labor market flexibility. However, labor market analysts have found not only that such
efforts have been largely unsuccessful at reducing unemployment or increasing labor mobility, but also that
the United States experienced rising wage inequality over the same time period that unemployment problems
occurred in Europe. In other words, both the United States and Europe face serious labor market problems.

In
this working paper, Rebecca M. Blank, of Northwestern University and the Northwestern
University/University of Chicago Joint Center for Policy Research, analyzes these problems to assess the
extent to which they reflect different institutional responses to related economic problems.