What explains high unemployment among low-skilled workers? Evidence from 21 OECD countries

Abstract

In OECD countries, unemployment disproportionately affects low-skilled workers. This article examines four explanations: wage-setting institutions, employment regulation, globalization and monetary policy. The analysis is based on pooled regressions for 21 affluent countries over the period 1991—2006. We find no support for the argument that low-skilled workers’ employment prospects are hindered by legal minimum wages or strict employment protection, nor that wage inequality improves low-skilled employment. By contrast, investment in active labour market policies pays off and low real interest rates are associated with significantly less low-skilled unemployment. Hence, low-skilled workers’ job prospects seem enhanced by a combination of active labour market programmes with monetary policy that fully exploits the economy’s growth potential.