Do employment and income security cause unemployment? A comparative study of the US and the E-4

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Abstract
High unemployment in Europe has led many economists and policy-makers to praise rapid job creation and low unemployment in the US and to credit its relatively unregulated labour markets for this success. We question the implication that Europe should adopt US-style labour market deregulation and flexibility. A detailed examination of the US and E-4 (French, German, Italian, and UK) data reveals almost no difference in unemployment rates for ‘prime-age’ males but large ones for other demographic groups both within and among all countries (and not just between the US and the E-4). We also assess the impact of various employment regulations, wage-setting institutions, and income security policies on E-4 unemployment. We conclude that the evidence is mixed, and, more importantly, that the same institutions which may raise unemployment in Europe are also contributing to its more rapid earnings growth and greater earnings equality relative to the US. Thus, European labour market deregulation would at best be a very mixed blessing.

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