Wage Gaps vs. Output Gaps

This paper studies the relationship between real wages and unernployment in Europe. It finds no evidence that high real wages are responsible for the differing behavior of unemployment in Europe as contrasted with the U. S., and across European countries finds patterns of real wage behavior that are the opposite of what would be required to link high real wages and high unemployment. Among the specific results are: (1) After adjustment for the income of the self-employed, there is no evidence of excessive real wages in Europe. "Wage gap" (i.e., labor's share) indexes on a 1972 base were almost identical in Europe and the U. S. in 1963 and 1984. The slight bulge in the European wage gap between 1974 and 1978 amounts to only about five percentage points over the IT. S. values. (2) There was indeed a real wage explosion between 1966 and 1975 in three small high-unemployment countries (Belgium, Denmark, Netherlands). But the wage gap barely moved in the four large high-unemployment countries (France, Germany, Italy, U. K.), and in fact increased substantially less than in low-unemployment Austria. Thus the wage gap concept is almost useless in providing an explanation of differences in