LABOR MARKET FLEXIBILITY, SOCIAL PROTECTION AND UNEMPLOYMENT

The difference between low unemployment in the USA and high unemployment in continental Europe is frequently attributed to differences in labor market flexibility. European workforces are protected against job and income losses by welfare state programs and protective legislation, which are taken to be responsible for labor market rigidities and, therefore, higher unemployment. The logic of this argument and the evidence supporting it are examined. While US unemployment in general and long-term unemployment in particular have recently been considerably lower than in the large European economies, this is not the case for smaller European economies with extensive welfare states. They provide evidence for the possibility of using social protection not as an obstacle to, but as a means to enhance, flexibility.