April 1997
Abstract
One of the most remarkable features of international economic performance
in the last decade has been the employment performance of the United
States. While unemployment rates in almost all other developed
countries remain high by postwar standards, the U.S. unemployment
rate has fallen to levels not seen in decades. Even more spectacular
than the decline in unemployment is the increase in the fraction
of the U.S. population employed, which has exceeded that in almost
all developed countries.
A phenomenon of such magnitude of
course calls out for an explanation. Probably more than any
other single factor, some form of “labour market inflexibility”
has recently been blamed for the high unemployment rates outside
the United States. In a number of forums, including the policy
recommendations of the Organization for Economic Cooperation and
Development (OECD), “rigid” labour markets, with considerable
government and/or union involvement in wage-setting, and
considerable restrictions on firms’ abilities to adjust the
size of their work forces, are commonly seen as more prone to
unemployment and less conducive to employment growth than more
flexible ones.
The purpose of this paper is to provide a critical
assessment of the popular notion that differences in labour market
“flexibility” explain the recent differences in employment and
unemployment rates between the U.S. and other developed countries.
In addressing this issue I shall focus particular attention on a
comparison between two countries, the United States and Canada.
On the surface, the recent experience of these two countries would
appear to support the hypothesis, with the more “rigid”
country --Canada, where unions have much more influence on the
wage-setting process and employment protection is
stronger--experiencing much worse unemployment performance since
the early 1980's. Indeed the proximity of the countries and their
similarity along other dimensions may yield an ideal comparison
for assessing the labour market flexibility hypothesis.
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