Transatlantic Differences in Labour Markets: Changes in Wage and Non-Employment Structures in the 1980s and the 1990s

Abstract. Rising wage inequality in the United States and Britain and rising continental European unemployment have led to a popular view in the economics profession that these two phenomena are related to negative relative demand shocks against the unskilled, combined with flexible wages in the Anglo-Saxon countries, but wage rigidities in continental Europe ('Krugman hypothesis'). This paper tests this hypothesis based on seven large person-level data sets for the 1980s and the 1990s. I use a more sophisticated categorization of low-skilled workers than previous studies, which exhibits differences between German workers with and without apprenticeship training, particularly in the 1980s. I find evidence for the Krugman hypothesis when Germany is compared with the United States. However, supply changes differ considerably between countries, with Britain experiencing enormous increases in skill supply explaining the relatively constant British skill premium in the 1990s.