Trends in European labour markets and preferences over unemployment and inflation

Speech by Professor David Blanchflower, member of the Monetary Policy Committee, given at the Dresdner Kleinwort Seminar on European Labour Markets and Implications for Inflation and Policy on 27 September 2007.

In this speech Professor David Blanchflower, examines the extent to which differing labour market institutions can provide an explanation of variations in unemployment rates across Europe over the past 50 years. He finds little evidence in the data to support this line of argument; rather he observes that poor labour market performance
is due to rigidities in product, capital and housing markets. Turning to wages, he discovers that while there is little empirical evidence to support the existence of a stable Phillips curve across countries or time, there is considerable stability in the impact of unemployment on wages across countries, as described by the wage curve. Finally, using happiness equations, he measures the marginal rate of substitution between unemployment and inflation, discovering that in aggregate, society prefers a reduction in unemployment over a reduction in inflation.