Transatlantic Differences in Labour Markets A Test of the ‘Krugman Hypothesis’ for the United States, Britain, and Western Germany

Rising wage inequality in the U.S. and Britain and rising continental European unemployment (with rather stable wage inequality) have led to a popular view in the economics profession that these two phenomena are related to negative relative demand shocks against the unskilled in the industrialised world, combined with flexible wages in the Anglo-Saxon countries, but institutional rigidities in continental Europe (‘Krugman hypothesis’). However, empirical evidence on these questions is sparse. This paper tests the Krugman hypothesis based on several large individual data sets without making restrictive assumptions on supply behaviour as some previous studies. In addition, I use a more sophisticated categorisation of low-skilled workers, which turns out to be important in the distinction between German workers with and without apprenticeship training. I find evidence for the Krugman hypothesis when Germany is compared to the U.S. However, supply changes differ considerably between countries, with especially Britain experiencing enormous increases in the supply of skills which can explain the relatively constant British skill premium.