What explains high unemployment among low-skilled workers? Evidence from 21 OECD countries

In the OECD, the burden of unemployment mainly weighs on the shoulders of low-skilled workers. In this paper, four explanations of low-skilled workers' unemployment are examined: wage-setting institutions, employment regulation, globalization, and monetary policy. The analysis of unemployment is based on pooled regressions for 21 affluent countries over the period 1991-2006. Our findings provide no support for the hypothesis that low-skilled workers' employment prospects are hindered by legal minimum wages or strict employment protection. Likewise, large wage inequality does not seem to be a necessary condition for countries to achieve low rates of low-skilled unemployment. In contrast, investment in active labour market policies pays off in form of less low-skilled unemployment. Additionally, low real interest rates are associated with significantly less low-skilled unemployment. Hence, low-skilled workers' job prospects seem enhanced by a combination of active labour market programs with a monetary policy that fully exploits the economy's growth potential.