Egalitarian wage policies, unemployment and skill-biased technological change

A popular explanation for the rise in European unemployment during the past decades is that relative wages failed to adjust to changes in relative productivities. Many economists reject this hypothesis on the ground that the ratios of low-to high-skill unemployment did not increase. Building on a search model, I argue that relative unemployment rates are affected by skill-neutral, as well as skill-biased shocks; hence stable ratios are theoretically consistent with a mix of skill-biased and skill-neutral shocks. Yet, numerical exercises confirm that wage rigidity in the face of skillbiased shocks probably did not explain much of the European unemployment experience. (C) 2005 University of Venice. Published by Elsevier Ltd. All rights reserved.