THE POSITIVE ECONOMICS OF UNEMPLOYMENT AND LABOR-MARKET INFLEXIBILITY

This paper explores the puzzling inaction of governments in Europe con cerning labor market liberalization. Although high and persistent unem ployment Is currently one of the most important political problems, an d 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 assert ion is shown to be especially valid It is argued that this puzzle can be solved by adopting a politicial economy perspective. Labor market r igidities serve political economy considerations mainly by benefitting well organized insiders at the expense of badly organized and politic ally marginalized outsiders and by creating a larger political core wh ich is interested in political stability. Hence, devising not only eff ective but also politically feasible policies for fighting unemploymen t is a challenging task. However, it is argued that there exist import ant long-run economic trends, namely skill-biased technological progre ss and globalization, which work in favor of more liberalized labor ma rkets.