The economic position of the less skilled members of the workforce has deteriorated over the past 20 years, both in Western Europe and in the USA. In Europe, the deterioration manifests itself primarily through higher unemployment. In the USA, it manifests itself mainly through lower real and relative wages. The phenomenon has a cyclical aspect, associated with slow growth and recessions. There is, however, also mounting evidence of a structural trend, associated with technological development and competition from low-wage economies – a trend that is likely to gain rather than lose momentum over the coming years. The combination of uncertain growth perspectives and a lasting structural weakness exacerbates the conflict between equity and efficiency: how can we promote full employment without producing unsustainable income inequalities?

This chapter surveys some of the evidence and arguments. Section 1 reviews briefly the current situation, the weight of the evidence behind proposed explanations, and the theoretical case for international wage convergence. Section 2 discusses policy objectives and brings out the efficiency–equity dimension of the problem. Section 3 evaluates some policy alternatives and draws conclusions.

The weakened position of less-skilled workers

High unemployment and low wages

The simplest and most objective measure of skills is educational attainment. Table 8.1 records unemployment rates for five levels of education in 19 OECD countries in 1989. In every single country there is a marked decline in unemployment as education rises.