Labor market rigidities are often claimed to be at the root of the European unemployment problem. The following article contends that this is not a very plausible explanation. The author presents a theoretical approach based on the interaction of both sides of the market, different from common business cycle explanations. He argues that employment growth is indeed compatible with social security and that market economies do not need to converge to a uniform institutional setting. Structural change needs to be supported by macroeconomic policies, however, which has been the case in the USA and in the Netherlands but not in Germany.
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