Unemployment in Europe: Swimming against the Tide of Skill-Biased Technical Progress without Relative Wage Adjustment

The hypothesis that European unemployment is the rigid relative wage mirror-image of increased wage dispersion in the US is explored. The <p> framework is a two sector –manufacturing and services- model with <p> skilled and unskilled labor. A proxy for skill-biased technical progress (SBTP) is constructed from data on total factor productivity (TFP). Econometric analysis of the relationship between SBTP and aggregate unemployment shows that SBTP explains some 50% of the unemployment increase in major European countries since the early 1970s, but it does not explain US unemployment. The hypothesis is robust in that it is not rendered void by inclusion of alternative, mostly macroeconomic, explanatory variables. <p>