DP867 Inequality and the Political Economy of Eurosclerosis

Author(s): Paul Krugman

Publication Date: November 1993

Keyword(s): Eurosclerosis , Inequality , Unemployment , Welfare State

JEL(s): E0 , J3

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP867.asp

Before the early 1970s generous welfare states seemed to be consistent with high employment. Since then, there has been growing concern over disincentive effects of social insurance. This paper suggests that the problem may have arisen in part because European nations were in effect trying to fight market tendencies towards increased inequality. In the United States, with its much more limited welfare state, there has been a striking rise in inequality; a stylized model suggests that the response of redistributive states to these same market forces could have led to a considerable fall in employment.