The positive economics of unemployment and labor market inflexibility

This paper explores the puzzling inaction of governments in Europe concerning labor market liberalization. Although high and persistent unemployment Is currently one of the most important political problems, and although most economists regard more liberalized labor markets as a prerequisite for better employment results, in terms of actual reforms very little has in fact been achieved. In the German case this assertion is shown to be especially valid It is argued that this puzzle can be solved by adopting a politicial economy perspective. Labor market rigidities serve political economy considerations mainly by benefitting well organized insiders at the expense of badly organized and politically marginalized outsiders and by creating a larger political core which is interested in political stability. Hence, devising not only effective but also politically feasible policies for fighting unemployment is a challenging task. However, it is argued that there exist important long-run economic trends, namely skill-biased technological progress and globalization, which work in favor of more liberalized labor markets.