The level of unemployment varies considerably between
countries. This book explains this by differences in
their ability to neutralize economic shocks. The
starting point is a review of the social and
psychological literature in order to understand how
joblessness affects people. The review shows that
unemployed workers tend to reduce their search effort
as time spent unemployed increases. The reason is
that there are psychological costs attached to
receiving rejections on job applications. So, if
unemployment is allowed to rise, it
may not come down again. Hence, counteracting
negative shocks may have long lasting beneficial
effects to the economy. However, the counteracting
ability depends crucially on wage setting
institutions. In this regard, decentralized regimes
with generous welfare systems are the least
favorable, and centralized regimes with the same
generosity are the most favorable. Decentralized
regimes with less generosity, as in the US and UK,
lies somewhere in between. The last chapter in the
book analyzes the consequences of decentralizing wage
setting, both with and without a welfare reform.