Economic Growth in the U.S. and Europe: The Role of Knowledge, Human Capital, and Inventions

Abstract

In the last decade the high unemployment rate in Europe, compared to the U.S., has been attributed to specific labor market problems in the European economy. A widespread view among academics and politicians was that the high rate of unemployment in Europe has been caused by the labor market itself. It has been maintained that in Europe strong labor unions, strong position of insiders vis-à-vis outsiders on the labor market, restrictions of hiring and firing practices, job protection and generosity of unemployment benefits have caused a persistent high level of unemployment in the E.U.. The flip side of this hypothesis is that conversely labor market flexibility in the U.S. and wage spread has helped to accelerate employment. In particular, it is often maintained that there has been extensive job creation for low income groups. In the last few years, however, many U.S. labor market specialists, see for example Krueger and Pischke (1997), have become skeptical to consider labor market rigidities as the sole cause for the high and persistent rate of unemployment in the E.U.. The volume of the potential labor force in the U.S. that has been integrated into the active workforce has been too large to be explained by labor market flexibilities solely.¹ Conversely Europe, so it is argued by American labor economists, lacked such a large rate of job creation.