Labour Supply and Incentives to Work in Europe
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Labour Supply and Incentives to Work in Europe

Edited by Ramón Gómez-Salvador, Ana Lamo, Barbara Petrongolo, Melanie Ward and Etienne Wasmer

Labour Supply and Incentives to Work in Europe highlights recent developments in the labour supply in Europe and gives a detailed assessment of their link with economic policies and labour market institutions. Despite major changes in European labour supply during the past few decades, the existing literature still lacks a comprehensive study of the relationship between labour supply and labour market institutions from a macro perspective.
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Chapter 1: A Matching Model of Non-Employment and Wage Pressure

Andrew Brigden and Jonathan Thomas


1 Andrew Brigden and Jonathan Thomas2 INTRODUCTION The contrasting behaviour of unemployment across European countries over the last decade has attracted considerable comment and analysis. For example, while the UK, the Netherlands, Ireland, Denmark and Spain have experienced sharp falls in unemployment since the mid-1990s, the jobless rate has moved much more sluggishly in countries such as France and Italy, while actually increasing a little in Germany (Table 1.1). The explanations proffered for this divergence include changes in the pattern of wage bargaining, reforms of the benefit system, skill mismatch, labour taxes, active labour market policies and employment protection legislation (Nickell and van Ours, 2000; Pissarides, 2003). Less attention has been paid to the fact that inactivity has been much more stable over the period (Table 1.1). While the average 1993–2002 change in the unemployment rate across the thirteen countries shown in Table 1.1 stood at around Ϫ4.3 percentage points, the corresponding change in inactivity was Ϫ1.8 percentage points. One consequence of this relative stability of inactivity has been that the ratio of the inactivity rate to the unemployment rate has risen in each country over the period, except in Germany where it has been basically flat (Figure 1.1). What are the implications of these developments for monetary policy? Nickell (2001) focuses on the role of a relatively high inactivity rate on restraining the growth of potential output. However, it might also have implications for aggregate wage pressure. One possibility is that a relatively high inactivity rate...

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