Technology and Labor Regulations

assistantship. Joseph Zeira thanks the Israel Science Foundation for financial support. Many low skilled jobs have been substituted away for machines in Europe, or eliminated, much more so than in the US, while adoption of advanced technologies at the “top”, i.e. at the high-tech sector, is faster in the US than in Europe. This paper suggests that this can be a result of different labor market policies in Europe and the US. European countries reduce wage flexibility and inequality through a host of labor market regulations, like binding minimum wage laws, permanent unemployment subsidies, firing costs, etc. Such policies create incentives to develop and adopt labor saving capital intensive technologies at the low end of the skill distribution. At the same time technology in the US is more skill biased than in Europe, since American skilled wages are higher. 1 1