There is a common view that unemployment in Europe is attributable to rigid wage structures, high minimum wages, and generous social welfare systems. In fact, countries that possess the low inequality such systems produce tend to experience less unemployment than those that do not. We show that inequality and unemployment are related positively across the European continent, within countries, between countries, and through time. Large intercountry inequalities across Europe also appear to aggravate the continental unemployment problem, and we find evidence that when these inequalities are taken into account, overall earnings inequality is higher in Europe than in the United States. We therefore suggest that the key to reducing unemployment in Europe lies in measures that reduce, not increase, inequalities in the structure of pay – and that do so at the continental level. This is a long-standing and often overlooked characteristic of social welfare policy in the United States.

Introduction

What is the relationship between inequality and unemployment? This question is perhaps the most important issue in the political economy of Europe, and it has relevance for other regions with developing transnational ties, including the United States and the North American region.

One widely held view is that high unemployment rates in Europe are due to that continent's generous social welfare systems and “rigid” wage structures, or, in other words, to the equality that is the characteristic goal of social democracy.