Showing papers on "Economic problem published in 1994"

The Economic Underpinnings of Patent Law

Abstract: PATENTS play a crucial role in the economy. The economic principles underlying the patent system have not always been well understood, especially in the courts. In part, the difficulty lies in two circumstances: first, that innovation is essentially the creation of information, which has different economic characteristics from goods, and second, that the patent system, while effectively dealing with this primary problem of the special nature of innovation, nonetheless creates secondary economic problems. And in part the esoteric nature of patent law has obscured the way in which patent law doctrines deal with these secondary problems. This article, after analyzing the secondary economic problems created by the patent solution to the information aspect of innovation, will show in detail how patent law has effectively, if often inarticulately, minimized the impact of these problems. To start with, it is important to recognize the primary problem that the patent system solves. This problem-often called the "appropriability problem"-is that, if a firm could not recover the costs of invention because the resulting information were available to all, then we could expect a much lower and indeed suboptimal level of innovation. In short, the patent system prevents others from reaping where they have not sown and thereby promotes research and development (R&D) investment in innovation. The patent law achieves this laudable end by creating property rights in inventions. In creating these property rights known as "patents," however, secondary problems are created that can lead to market

Trade, Jobs and Wages

Abstract: There is a broad consensus among US opinion leaders that our economic problem is largely one of failures of international competition -- that trade deficits have eroded our manufacturing base, that inability to sell on world markets has been a major drag on economic growth, and that imports from low-wage countries have caused a widening of income inequality. This paper summarizes recent evidence on these issues, and shows that while there may be a grain of truth to each complaint, in each case the effect is quantitatively minor. The arithmetic of 'competitiveness' just doesn't work.

Equilibrium and evolution : an exploration of connecting principles in economics

Abstract: Economic theory and economic problems the organization of knowledge economic organization firms markets innovation.

Hierarchical choice in economics

Abstract: . The paper examines the relevance for economic issues of choice which is not characterized by unlimited substitutability. After showing that hierarchical choice is common in other social sciences like psychology, the paper proceeds with an examination of such choice and of its different categories. Subsequently the implications for hierarchical choice for specific economic issues are analysed. In particular, there is discussion and literature review of demand theory, Engel curves, the theory of the firm and social choice theory. Finally, some suggestions for the application to other economic problems are considered.

Bridging the natural and the social: science and character in jevons's political economy

Abstract: As human knowledge and civilisation progress, these characteristic differences [in human behaviour] tend to develop and multiply themselves, rather than decrease. Character grows more many sided. Two well-educated Englishmen are far better distinguished from each other than two common labourers, and these are better distinguished than two Australian aborigines. [W. Stanley Jevons 1887, 734] I. INTRODUCTION Scholars have devoted much attention in recent years to explaining the differences between the basic analytical frameworks of classical political economy and the marginalist supply and demand theories published by William Stanley Jevons and Leon Walras in the 1860s and 1870s. While disagreeing over the precise form of the differences, historians of economics commonly describe the "marginalist revolution" by three interrelated aspects of its analytical domain. As summarized by Winch [1972], these aspects are (1) the type of problems considered to be within the domain of economic science; (2) the criteria used to designate the domain boundary so as to distinguish between "economic science" and other types of analysis; and (3) the conceptualization of economic actors within the domain. More specifically, Winch argues that marginalism is distinguished by its "recognizing scarcity of given means in relation to alternative uses as the economic problem" and explaining this in terms of the "universal application of the laws of human choice" [1972, 328, Winch's italics, 335]. With activity in the domain of economic science "explicitly including both material and immaterial goods and services, moral and immoral," its boundary was set by drawing a clear distinction between "pure and applied science" which corresponded to the distinction between positive and normative propositions. Finally, the depiction of economic actors entailed a "thorough going individualism ... which placed the rational maximizer at the centre of things." In keeping with this account, Cohen and Cohen [1983, 195-197] have argued that, while the concept of social class was a "fundamental aspect" of classical political economy, it was "irrelevant" in marginalism because "individuals form the basic unit of analysis, and individual demand is the driving force of the system. These aspects can be seen most clearly in Jevons's work."(1) I will argue here that this characterization of the economic domain in Jevons's marginalism is misleading and that it effaces a number of important differences between the ideas propounded in his Theory of Political Economy (hereafter Political Economy) and later versions of supply and demand theory. Using the discussion of reduced working hours in Political Economy to illustrate the analysis, I will show that the theoretical object of Political Economy cannot be reduced to an analysis of "rational behavior" per se and that Jevons did not rely on a distinction between positive and normative propositions. Indeed, he argued that the domain of economic science provided the means to advocate or reject particular government policies. Moreover, although there is an important analytical difference between the social individuals of the classical framework and the abstract individuals of marginalism, references to Jevons's individualism do not explain the significance of the discussion of class and race behavior which pervades his work.(2) The paper is presented in four sections. The first discusses how Jevons specified the domain of "scientific" political economy using a particular Utilitarian theory of ethics. This enabled him to make a distinction between policy questions which lay within the province of economic science and those which did not because they raised questions of ethics and duty. One policy question which fell outside the domain was legislation to reduce working hours, and the next two sections show why that was the case. Section III considers the "scientific" analysis of work hours in Political Economy where Jevons explained different work patterns in terms of class and race behavior. …

What Is Evolutionary Economics

Abstract: All evolution is concerned with the growth of knowledge, a proposition no less true in economic systems (and society in general) than in biological ones. As the philosopher Elliott Sober (1984) notes, evolutionary theory is a theory of forces, that is, a theory of the causes of change, of the processes that produce a certain sequence of events and entities. Hayek (1945, p. 523) proposed that “economic problems arise always and only in consequence of change.” This implies that evolutionary theory is one way of studying economic problems. What is the evolutionary explanation in economics? How does it differ from the orthodox, that is, the neoclassical, explanation? The essay is an attempt to answer these questions by looking at the history and present state of evolutionary thinking in economics.

China's economic reforms : pointers for other economies in transition?

Abstract: China's two main economic problems before reform were low incentives to workers and the misallocation of resources among sectors. These problems were the result of a development strategy oriented toward heavy industry. By improving material incentives, China's reforms created a flow of new resources and allowed them to be allocated to sectors suppressed under pre-reform strategies. The onset of reform in China was not allowed to disrupt production from existing resources. Instead, the newly created resources were permitted to accrue and to flow into the more productive, often light industrial sectors, thus stimulating continuous growth of the national economy during reform. Low incentives and the suppression of nonpriority sectors are common features of the legacy of economies in transition from central planning that based their development on the rapid growth of heavy industry. China's approach may be of interest to them. Among lessons China learned are that: (a) Autonomy must be granted to micromanagement units and preserved to improve the incentive structure and create a new flow of resources. (b) While maintaining essential minimum levels of production in the pre-reform priority sectors, autonomous enterprises must be permitted and encouraged to allocate new incremental resource flows to the previously suppressed sectors. (c) In parallel, the distorted policy environment and planned-allocation system must be progressively reformed to bring them into line with the new system of incentives and modus operandi of autonomous enterprises.

Understanding American Economic Decline

Abstract: The public has long been painfully aware of the economy's stagnation. The contemporary recession has brought to the foreground problems which have been germinating for decades. Falling real wages, slow productivity growth, and the loss of international competitiveness in major industries all are outgrowths of long-term developments that predate this crisis. As the United States moves from a position of global economic leadership to one of economic interdependence, we need alternative approaches to explain the dramatic changes in the US economy. This collection of essays, written by leading scholars, presents a systematic analysis of the nation's economic woes. The authors furnish more than hard-hitting criticisms of the US economy. They provide hope as they offer solutions to America's most pressing economic problems.

The Regulated Economy

Abstract: How has the United States government grown? What political and economic factors have given rise to its regulation of the economy? These eight case studies explore the late-nineteenth- and early twentieth-century origins of government intervention in the United States economy, focusing on the political influence of special interest groups in the development of economic regulation. The Regulated Economy examines how constituent groups emerged and demanded government action to solve perceived economic problems, such as exorbitant railroad and utility rates, bank failure, falling agricultural prices, the immigration of low-skilled workers, workplace injury, and the financing of government. The contributors look at how preexisting policies, institutions, and market structures shaped regulatory activity; the origins of regulatory movements at the state and local levels; the effects of consensus-building on the timing and content of legislation; and how well government policies reflect constituency interests. A wide-ranging historical view of the way interest group demands and political bargaining have influenced the growth of economic regulation in the United States, this book is important reading for economists, political scientists, and public policy experts.

The environment after Rio : international law and economics

Abstract: The United Nationsl Confeence on Environment and Development (UNCED) held in Rio de Janeiro in June 1992, forms a cornerstone in the development of a new international regime for the protection of the environment. It stressed, inter alia, the close links which exist between the economic problem of Third World development and the protection of the environment. The use of natural resources must be sustainable, in order to pass on an acceptable environment to future generations. For this purpose States have common but differentiated responsibilities. This book analyzes the most relevant results of the Rio discussions and looks at prospects for the future from a political, legal and economic point of view. The authors of the essays are eminent specialists in international law and economics from various parts of the world. The essays are updated versions of the papers submitted to a Conference organized by the Istituto per l'Ambiente (a non-profit organization based in Milan, Italy) held in Courmayeur, Italy on 11-13 February, 1993.

Economic Applications of the Shapley Value

Abstract: In the previous chapters, the concept of value was presented in a very abstract way. It has proved, however, to be a powerful tool in modelling some economic problems. In fact, since the Shapley value can be interpreted in terms of “marginal worth”, it is closely related to traditional economic ideas. To illustrate this, we first present the Value Equivalence Theorem — the analogue of the Core Equivalence Theorem. Though other important applications exist, we then focus on three applications of the value concept to economic models other than the general equilibrium model. Each of them describes a way of departing from the market model environment. The first two are economic-political models dealing with taxation. Taxation has (at least) two purposes: redistribution and the raising of funds to finance public goods. The classical literature assumes that a benevolent government takes decisions so as to maximize some social utility function. On the contrary, analysing the government as subject to the influence of those who elected it brings new light on both aspects. Value appears to be a natural tool to deal with the voting games that are part of the two corresponding models. In the last section, we deal with economies with fixed prices.

The problem of bad loans and enterprise indebtedness in Bulgaria

Abstract: The problem of bad enterprise and bank debts has developed into one of the most acute economic problems in PETs. The general delay in implementing comprehensive policy measures to combat this issue as well as mismanagement contributed to the snow-balling of bad loans. In the case of Bulgaria this led to a major financial crisis and the authorities had to undertake a large-scale rescue operation.

New Directions for Urban Policy

Abstract: Contrary to the conventional diagnosis of urban problems, this article argues that these problems do not arise from the long‐term trends in the decentralization of employment and population in metropolitan areas. Instead, the most important fiscal problems confronted by central‐city governments and the most significant social and economic problems of central‐city residents arise from increased concentrations of poverty populations and from racial discrimination in the operation of housing markets. Recognition of these causes leads to urban policy prescriptions that emphasize integration of income transfer mechanisms and vigorous enforcement of fair housing laws and that deemphasize job creation and other employment programs targeted to predetermined central locations. Housing policies emphasizing demand‐side subsidy rather than place‐oriented supply programs are more consistent with the long‐term market forces determining the spatial pattern of economic activity in urban areas.

Economic Theory and Social Institutions: A Critique with Special Reference to Canada

Abstract: This book introduces students to the present state of the art in the economics of institutionalism and social policy. It also introduces the reader to a critique of mainstream economic thinking, followed by the development of a humanistic social interaction model of economic institutions, behavior, and social policy. The author takes a broad look at some of the major problems of social institutions and policy in the Canadian context. Contents: List of Figures; List of Tables; Acknowledgments; Introduction; Economics and Social Institutions; The Nature of Economic Theory; Resolution of the Great Economic Problems of Contemporary Times; Economic Issues of the Public Sector; Economic Problems of the Private Sector; Socio-Economic Issues Related to the Problem of Poverty; Economic Growth and Development; Regional Economic Development; Labour Market; Inflation and Unemployment; Social Contractarianism for Humanistic Institutionalism; Economics of Canadian Constitutional Provisions under the Unity Accord; Institution-Economy Interface of Canadian Debt and Deficits.

The Nature and Constructs of Relative Expertise in Economic Problem Solving: Preliminary Findings.

Abstract: MF01/PC03 Plus Postage. Content Analysis; Correlation; *Economic Factors; Economic Research; *Economics; *Economics Education; *Factor Analysis; Higher Education; Least Squares Statistics; Problem Solving This paper reports preliminary research into the nature of relative expertise ilk economic problem solving. The first section briefly describes why such research is needed in the context of research on expert and novice problem solving. It also presents the problem explored in this study in the context of the existing research. Subsequent sections present the methods, results, and conclusions of the study. The researchers examined literal transcripts generated from the "talk-aloud" protocols of 28 participants responding to three economic problems. Each sub-group contained four participants: (1) high school students who had taken economics and those who had not taken economics; (2) undergraduate economics majors and non-majors; (3) graduate students in economics; and (4) Ph.D. economists employed in public and private forecasting and academic Ph.D. economists. The study employed a causal-comparative design with members of the seven sub-sample groups identified by the researcher. Three economics problems were employed in the study with several phases of data gathering involved in the analysis of data. Extensive charts and graphs accompany the text. Contains 32 references. (EH) "******************************************** Reproductions supplied by EDRS are the best that can be made * from the original document. ****************************************--******************* The Nature and Constructs of Relative Expertise in Economic Problem Solving: Preliminary Findings Phillip J. VanFossen State University of New York at Geneseo School of Education 1 College Circle Geneseo, NY 14454 716-245-5227 e-mail: vanfoss@uno.cc.geneseo.edu Steven L. Miller The Ohio State University The Mershon Center 1501 Neil Ave. Columbus, OH 43201 614-292-1681 e-mail: smiller@magnus.acs.ohio-state.edu Paper presented at the .Annual Meeting of the National Association of Economic Educators and the National Council on Economic Education October 1, 1994 Williamsburg, VA

Self-Organization and Organization of the Economy and the Search for a New Paradigm in Economic Science

Abstract: The discussion that has arisen in this journal's pages is very timely despite the fact that it seems to be divorced from current economic problems. In actual fact, the development of real approaches to the solution of these depends in large measure on the general assessment of the current economic situation, on the choice of a concrete program or model of transition to a market economy that will promote not only the extrication of the country from crisis, but also the strengthening of our economy's world economic ties. Analysis of the prospects and tendencies in the development of the world economy and progressive economic thought is of no little importance here.

Employment, growth and finance

Abstract: This important new book brings together a significant body of new essays on some of the central economic problems facing governments, firms and individuals in the 1990s.

Innovation, Resources and Economic Growth: Changing Interactions in the World Economy

Abstract: The analysis of the role of natural resource scarcity and technologies in the dynamics of economic systems has a long tradition in economic theory and applied economics, at times having been the central issue (for a summary see Quadrio Curzio 1988, 1992 and 1993). One aspect of the resources-technology-growth issue clearly stands out: although remaining the same in its general traits, it constantly reappears in new and distinctive forms.

Resource Management in Developing Countries: Africa's Ecological and Economic Problems

Abstract: Valentine James provides a general overview of Africa's environmental problems. His analysis is broadly interdisciplinary, drawing upon historical, socioeconomic and political aspects of environmental problems. Several chapters provide descriptive information concerning the varied and complex geographic and ecological features of the continent, revealing their vulnerability to various types of development. Other chapters address specific environmental problems such as the management of soil and water resources, agriculture and urban growth. Within these issue areas, the author examines and assesses specific programs and strategies. In the final section of the book the author stresses the need to integrate agricultural and environmental principles to promote both sound resource management and self-sufficient food production. The author's own research has focused on the environmental problems of Nigeria, which ranks as one of the worst environmental dilemmas in Africa. As such, many of the case studies and examples used throughout the book refer to the Nigerian situation. Topics such as deforestation, desertification and gender issues are examined within this context. In this respect the author reveals his own experiences and provides the reader with practical aspects of environmental problems and how state and local actors have either contributed to or sought to ameliorate these conditions. This book is important because it presents both the social and ecological dimensions of Africa's environmental dilemma. Indeed this type of integrated approach is needed in understanding both the causes of complex environmental problems and in determining potential solutions. James' discussion brings together important historical factors such as colonial agricultural policy which laid the foundation for the systematic conversion of resources for commercial purposes. Moreover, the book traces environmental problems to indigenous cultural and social factors (e.g. the perpetuation of traditional farming systems on marginal lands), misguided government development strategies and external factors such as the perpetuation of mass resource exploitation by transnational corporations. Interestingly, the author alludes to the concepts of sustainable development throughout the book, but does not explicitly develop or define this emerging paradigm. It would have been interesting to contrast this socio-ecological model with existing frameworks of environ-

Geographical economics or economic geography

Abstract: This paper deliberately polarises two broad approaches to economic geography. Geographical economics seeks to build a spatial dimension into broad theories of economic development and change, while economic geography represents the traditional geographer's approach which is focused on descriptions of the spatial distribution of economic activity. The paper argues that the latter approach continues to over‐emphasise neoclassical location theory and, thus, narrow analytical economic theory. This may account for the subject's apparent unpopularity with students, a problem which may be countered by the presentation of a more broadly based political economy approach to ‘economics’ issues at the outset of a geography degree programme.

The Transition to a Market Economy: Are there Useful Lessons from History?

Abstract: The mostly peaceful revolutions in central and eastern Europe at the end of the 1980s marked the ultimate breakdown of the traditional socialist systems in the region. Following many years of half-hearted and inconsistent reforms and growing popular pressure for more political freedom, the transformation of the entire social system came to be seen as the only way of overcoming the prevailing political and economic problems. The former European members of the Council for Mutual Economic Assistance (CMEA)1 decided to transform both their centrally-planned economies and their socialist political systems. The transition towards a democratic constitutional state, a market-type economy and social pluralism reflects the growing desire for a liberal way of life in eastern Europe.

Social Constructions and Cultural Contradictions: A Look at a Christian Perspective on Economics

Abstract: Christian Economics and the New Christian RightThe economic perspective that I label "Christian economics" is predicated on two things. One is the inerrant Bible and the other is the neoclassical economic paradigm. The former is cited to support the latter, in particular the economic theory's assumptions and implications concerning a capitalistic free-market economy, individual freedom and limited government. The particular position I will address is promulgated by the Contemporary Economics and Business Association (CEBA), head-quartered at Liberty University in Lynchburg, Virginia. The CEBA may be seen as a branch of the political movement often known as the New Christian Right. The following passage provides a succinct introduction to this position.The most potent justifications for the orientation to economic growth and material success within American culture have been those that imbue this orientation with broader religious meaning....American conservative ideology captures the libertarian emphasis on material progress and individual success, but envelopes these within an appeal to divine providence, transcendent values, and collective social bonds. In this way, contemporary American conservatism affirms both God and capitalism. (Himmelstein 22-23, emphasis added)The CEBA in fact seems to find God in capitalism and its supporting market theory, the neoclassical paradigm.The neoclassical economic paradigm presents an ideal image of market behavior where each economic actor has equal power and perfect knowledge, resulting in individual behavior that is rational and optimizing; actors in an economic market are always maximizing their utility or profit while minimizing their cost. Further, economic actors are assumed voluntarily and independently to enter the market about which they have full knowledge, each individual market transaction being viewed independently from any other. These assumptions combine to result not only in the maximization of individual satisfaction, whether profit or utility, but also in the best, most efficient solution to the economic problem (i.e., scarce resources combined with unlimited wants) for society--"the great good for the greatest number." This is an economically optimal, allocatively efficient solution in which no one can be made any better off without anyone else being made worse off. In the competitive market economy of neoclassical economics, prices efficiently ration goods and services, and distributive justice is thereby achieved in the private sector with the resulting distribution of economic resources.One function the neoclassical economic paradigm performs for Christian economists is that of a bridge between God and capitalism. Interestingly however, when Christian economists cite Scripture to legitimize the tenets of neoclassical economics, they never mention the story of Judas. Judas is an example of an economic man enjoying independent freedom of choice, of self-interested behavior that these proponents of Christian economics at least theoretically laud. The story goes: "Then one of the twelve, called Judas Iscariot, went to the chief priests, and said to them, 'What will you give me, and I will deliver him to you?' And they covenanted with him for thirty pieces of silver. And from that time he sought opportunity to betray him" (Matthew 26:14-16).The neoclassical economic paradigm celebrates this ever-optimizing individual whose behavior, by definition, insures the "just" distribution of economic resources. According to its assumptions, economic actors should follow their Internal subjective motivations concerning their own actions. Actions follow logically, rationally and consistently from values. But tautological problems plague the neoclassical paradigm because it cannot differentiate among behaviors. Behavior is accepted as evidence of values and results in utility maximization. So, since all behavior is maximizing, whatever the individual economic actor does will promote the most efficient solution to the economic problem. …

An Assessment of Economics Instruction in American High Schools

Abstract: Prior to 1960 serious problems confronted economics instruction in American high schools. A major concern was the limited amount of economics taught because few high school students ever took a separate course in economics, or received economics instruction in the context of other social studies courses. Compounding that problem was the way that economics was taught. Instruction in separate economics courses was descriptive, dry, and rarely included economic analysis. Coverage in textbooks and other instructional materials lacked economic analysis, and many organizations were inundating the schools with pamphlets and other materials, some of which were simply propaganda. Many high school teachers were inadequately prepared to teach economics or deal with slanted materials, so teachers’ value judgments often substituted for analysis in classroom discussions of economic problems or issues. Finally, economists and educational organizations showed little interest in, and provided no guidance for, the teaching of economics below the college level.

Arab economic integration : current reality and future prospects

Abstract: Despite repeated efforts to promote the integration of their markets, mutual trade between Arab countries remains very limited. This can be explained and understood against a set of physical, political and economic factors, regarded as formidable obstacles to the promotion of economic integration. Given the present economic environment, it is suggested that what Arab countries need most is not economic integration, but more and better education, less state-imposed distortions, and therefore more efficient utilization of their resources. Economic integration should then follow. Analyzing the impediments to economic integration should transcend the oversimplification of current realities to acknowledge the facts of a more complex situation.

Peace Economics: Future Directions and Potential Contributions to International Security

Abstract: In this chapter I wish to examine the emerging field of peace economics with regard to its potential contributions to international security. I shall pursue this examination having in mind in particular (1) the rapid political changes taking place in Central and Eastern Europe and the Asiatic parts of the former Soviet Union, and (2) the economic problems and military activities of developing nations.

Infrastructure Management: U.S. and Japanese Systems Contrasted

Abstract: Japanese public-works systems feature advanced technology, high rates of investment and a cooperative management culture. Public-works policy is guided by political consensus, a social contract to provide welfare infrastructure, and production infrastructure for economic goals. The Japanese have longer-range plans, more cooperation in research and development and regulatory policy, and more private-sector involvement than the United States. Coordination problems are mitigated by centralization, focus on group work, and personal relationships. Our individualism, adversarial public-private arrangements, and federal system discourage these approaches. The Japanese invest in infrastructure to stimulate the economy and to subsidize maintenance. Regionalization, land-use planning, and small-systems problems seem less daunting in Japan than in the United States. The Japanese have superb public-information material, indicating a commitment to gain consensus from each citizen. They are sensitive to environmental issues, and see them as a business opportunity. Women have fewer opportunities in Japanese agencies than in the United States. Lessons for the United States: invest in infrastructure in spite of economic problems; integrate decision making; improve coordination and cooperation; encourage public-private cooperation; cut regulatory red tape; be efficient and democratic in decision making; and learn from Japanese public-works management systems.

The Economic Dimension of the East–West Conflict and the Role of Germany

Abstract: A survey of the economic problems in East?West relations during the era of the Cold War is of particular interest from the German perspective. First, no other Western industrial country played a comparable role in the economic relations with East European countries; and secondly, East?West trade, especially the economic contacts with the German Democratic Republic (GDR), became an outstanding feature of German Ostpolitik under the conditions of the divided country. It appears to be an acceptable proposition to say that this form of West Germany economic and trade policy was the equivalent of the militarily defined US policy towards the Soviet Union, in so far as the famous dictum of the former Federal Chancellor Willy Brandt, that the Federal Republic of Germany (FRG) was 'an economic giant and a political dwarf only partly corresponded to reality. It therefore seems appropriate to discuss the economic dimension of the East-West conflict in the context of German interests and policies not to the exclusion of all else, but with a certain priority.

Why Employment Performance Differs

Abstract: It is not only labor markets but also product market regulations that chiefly determine a nation's employment performance Unemployment is widely viewed as the gravest economic problem for most industrial countries. In Europe, it has climbed steadily for the past 25 years to reach a postwar high [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. In the United States, it has been cyclical, with an average below that of Europe for the past decade. Japan has so far experienced low unemployment, although the early stages of economic reform and the recent rise in the numbers of the jobless suggest there is a risk that it will grow in the future. Much research has attempted to determine the causes of unemployment. Most of it has focused on macro analysis of the labor market. Though its findings are based on sound economic principles, the evidence available to test them is not conclusive. Despite references to the possible impact on unemployment of the markets for goods and services (product market) and for capital, no work to date has been able fully to determine this impact. To test conclusions about the labor market's effect on unemployment, and to investigate the role played by product and capital markets, the McKinsey Global Institute studied employment performance in France, Germany, Italy, Spain, Japan, and the United States from 1980 to the early 1990s.(*) We conducted analysis both at the level of the national economy and within seven industries: automotive, computers, furniture, banking, general merchandise retailing, film/TV/video, and construction. (See pp. 9-15 for case summaries.) Our principal findings are: * Japan and the United States have lower unemployment than Europe because they have created jobs in the market part of their economy, whereas European countries have lost jobs in theirs [ILLUSTRATION FOR EXHIBITS 2 AND 3 OMITTED]. * Product market restrictions were as important, if not more so, than workforce rigidity in explaining why job creation in Europe was below that in the United States, especially in high-growth service industries. - The creation of large numbers of service sector jobs in the United States has harmed neither job quality nor wages. - The United States has created more high-skill jobs than Germany and France [ILLUSTRATION FOR EXHIBIT 4 OMITTED]. Those countries have improved their job skill mix primarily by destroying low-skill jobs. * The wage distribution of service jobs in the US is almost identical to that of manufacturing [ILLUSTRATION FOR EXHIBIT 5 OMITTED]. Our findings for each country are summarized in the insert on pp. 6-7. The causes Differences in employment performance ultimately stem from differences in the rates at which industrial economies evolve. All economies are driven by natural evolutionary forces. As agriculture developed beyond the point of providing for self-sufficiency in food, productivity increases released labor for employment in manufacturing and services. As a result, jobs in these sectors rose as a fraction of total employment in all industrial countries during the first half of the twentieth century. In the second half, manufacturing employment peaked in industrial countries. Service employment, however, continued to rise. Today, productivity gains from innovative new products and processes continue to drive economic evolution and turnover in the labor market. Contrary to popular wisdom, productivity gains do not generally bring mounting unemployment and a declining economy. Rather, they provide more income for workers in old jobs, and free other workers to fill new jobs created by entrepreneurs. These entrepreneurs, in turn, produce innovative new products and services, which workers with increased incomes want to buy. The supply/demand balance in the economy is not automatic. An imbalance in one direction can generate inflation; in the other, it can frustrate growth and usher in recession. …