Labor market policy in a global economy : paper prepared for the Workshop "Globalization and Unemployment" March 23-24, 1999

This paper deals with the much discussed question how to design labor market policy in a global economy. The starting point of the paper is the fact that national unemployment rates differ greatly, which alludes to country-specific institutional factors being the most plausible culprit for rising and lasting unemployment. Hence, identifying institutional setups which promote employment growth is a prerequisite for successfully fighting unemployment. To this end the paper is divided into three main sections. The first section provides a non-technical synopsis of the main causes of persistently high unemployment which can in particular be observed in continental Europe. Special emphasis is put on the question how the ongoing process of globalization of goods and factor markets relates to the rise of unemployment. The by now standard explanation of rising unemployment is a change in the structure of labor demand towards higher skill requirements, be they caused by growing inter-industry trade or skill-biased technical progress, which conflicts with rigid wage structures in continental Europe. However, a number of important shortcomings of this approach are pointed out, which show that this is hardly an encompassing explanation (...)