The persistence of high unemployment in the main European economies is one of the most puzzling economic developments of the past fifteen years. Average Japanese unemployment has risen slightly since the mid-seventies, whereas unemployment in the United States still exhibits cyclical fluctuations around a gently rising level. In marked contrast, average unemployment in France, Germany and the United Kingdom rose to a higher plateau during the latter part of the seventies, shot up again in the early eighties, and has remained persistently high. Identification of the causes of such unemployment persistence is crucial before one makes policy recommendations. Three possible causes spring to mind: first, persistence in the determinants of equilibrium and disequilibrium unemployment; second, excessive power of insiders in wage setting combined with high correlation between employment status and insider status, and finally a high degree of state dependence (sluggishness) in labour demand. Although in general one expects all three causes to have played a role in the persistence of high European unemployment, there is still a need to identify their relative importance. The first set of factors has been assessed empirically in recent papers by among others, Sachs (1983), Bruno and Sachs (19X5), Bruno (1986) Layard and Nickel1 (1985), Bean, Layard and Nickel1 (1986), Newell and Symons (1985) and others. Many of these papers have also allowed for sluggishness in labour demand, although they did not particularly focus on it. The second set of factors has been investigated by Blanchard and Summers (1986), who concluded that there is evidence of much higher correlation between employment status and insider status in the three largest European economies, than in the United States.