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The marketization hypothesis - Precis - Brief Article

Monthly Labor Review - April 1, 2002

The percentage of women in the United States who work for pay is notably higher than in many European countries. Richard B. Freeman of the National Bureau of Economic Research and Ronald Schettkat of Utrecht University examined this fact recently.

In "Marketization of Production and the US-Europe Employment Gap" (NBER Working Paper Number 8797), they compare data on the United States and Germany in their investigation of "the marketization hypothesis." This hypothesis challenges previous explanations of the U.S.-European Union (EU) employment differences: that the EU lost jobs in the 1980s and 1990s because "its wage-setting institutions compressed wage differentials below market levels" and that "EU welfare state provisions led many to remain jobless longer than would otherwise be the case." In contrast, the marketization hypothesis explains the differences in terms of how the location of production--the household or labor market--affects demand in the labor market. Freeman and Schettkat present evidence indicating that Germans spend more time on household production than Americans and less time on market work. For example, Germans spend more time per week preparing meals. The difference in time allocation is most pronounced among women.

Freeman and Schettkat suggest that by producing relatively more goods in the market, the United States generates demand for low-skill labor, while by producing relatively more goods at home, Germany creates less of a demand. But what would lead to less marketization of the German economy compared with the United States? Freeman and Schettkat mention several possible factors: 1) higher tax rates and higher nonwage labor charges in Germany; 2) less dispersion of earnings in Germany; 3) higher proportion of women in the United States with college degrees; and 4) "differences in lifestyle" (Germans seem to prefer fewer working hours in the labor market.

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