Working under different rules.

• Author: Freeman, Richard B.
• Position: Program Report

For the past four years, many members of the NBER's Program in Labor Studies have been examining how labor markets and income maintenance systems work in the major developed countries: the United States and its trading partners and competitors in the world economy. The "Working Under Different Rules" project, funded largely by a grant from the Ford Foundation, has focused on: the determination of wages and the inequality of wages in different countries (directed by Lawrence F. Katz and me); training of workers (directed by Lisa M. Lynch); income maintenance programs (directed by Rebecca M. Blank); works council modes of worker representation (directed by Joel Rogers and Wolfgang Streeck); and extreme poverty (directed by David E. Bloom). An additonal related project, culminating in the book described later in this NBER Reporter, contrasted labor markets in Canada and the United States (directed by David Card and me).

On May 7, 1993, the project's leaders presented summaries of the work of their research teams at a conference in Washington, DC. These summaries will be published in a volume titled Working Under Different Rules. Also, the research papers written for each of the projects will be published by the University of Chicago Press. My intention in this report is to provide just a brief overview of the entire project.

WHY LOOK AT FOREIGN LABOR MARKETS?

We conceived this project in response to the difficult time that many American workers have had in the past two decades. Real wages have fallen for the less-educated worker. Inequality in earnings and employment opportunities among workers with different characteristics has increased. Unionism in the private sector has declined. And, poverty has increased for large segments of the population, although not among the elderly.

Of course, the 1980s were difficult for workers in much of Europe and in Canada as well. In those countries, unemployment went from below to above U.S. levels. Perhaps even more important, unlike in the United States, unemployed people remained jobless (albeit with relatively generous benefits that partially induced the longer unemployment spells) for several years. For instance, 6 percent of the unemployed in the United States in 1991 were out of work for a year or more, compared to 37 percent in France, and 51 percent in Spain. The contrasting unemployment experiences of the United States and Europe in the 1980s generated widespread discussion of the American jobs miracle, and of the virtues of "flexibility American style." Some observers thought that the United States had all the "answers" to the economic problems of the 1980s, and that Europe had much to learn from us, while we had nothing to learn from them.

The basic premise of our project was more measured: that while the United States had some positive outcomes in the labor market in the 1980s, it also had some negative ones. Thus, perhaps there was something Americans could learn from the labor market experiences and the social programs of Europe, Japan, and Canada.

FINDINGS

Wage Inequality

Is the U.S. pattern of rising wage differentials and wage inequality among workers with different levels of education a universal development in advanced capitalist economies? Or, have some countries not experienced huge increases in wage inequality? The evidence collected for the 1980s shows that increases in wage inequality were most substantial in the United States and Great Britain. Because the increased inequality in Britain occurred while real wages were rising, low-paid British workers actually realized modest increases in their real wages over the decade. By contrast, low-paid American workers had sizable decreases in their real wages.

Wage inequality rose, but by much less, in Canada, Japan, and in continental Europe. Inequality barely changed in France and Italy, fell in the Netherlands, and rose much less in Sweden and Germany than in the United States. Nowhere did the ratio of the earnings of college graduates to less-educated workers rise as much as in the United States. Indeed, earnings differentials by education actually declined in the rapidly growing Korean economy during the same period.

What differentiates countries with wage differentials that are increasing slightly, or stable, from countries such as the United States, which experienced large increases in inequality? Basically, three things: (1) countries with fairly stable wage differentials place more emphasis on wagesetting institutions than the United States does; (2) they also either have maintained the strength of unions or have experienced smaller declines in unionization than the United States; and (3) they have a better training system for their less-educated workers.

Many European countries have wage-setting systems that are relatively centralized, either because of government policies or because of strong trade unions. In some countries, the government extends contracts from union to nonunion workers; this makes collective bargaining the key to wage determination, even with only moderate or modest union representation. In both Germany and France, for example, the ministers of labor extend contracts negotiated between employer federations and unions to all employers in that particular sector. The French rely heavily on the national minimum wage in setting wages for all workers. Wagesetting in Italy and Sweden is relatively centralized, too. Italy's Scala Mobile, a centrally negotiated wage for low-paid workers, pushed up the bottom of the earnings distribution in Italy in the 1980s. In Sweden, bargaining between the main employers' federation and the main blue collar union federation reduced wage inequality through 1983. But centralized wagesetting weakened in Sweden later in the 1980s, and earnings differentials began to widen.

The extent...