Economic Integration and Unemployment in the EFTA Countries

Abstract

The rate of unemployment differed dramatically between the ED and the EFf A countries in the 1970s and 1980s, but not in the 1990s. In this article, we present a model that can explain the persistence of both high and low levels of unemployment as a consequence of employers' choice of employment policy. We contrast two employment policies: (1) a policy of cutting costs through layoffs when production is currently unprofitable and (2) a no-layoff policy that maintains a larger than necessary workforce during downturns in order to be assured of an adequate supply of labor during upturns. We show that either policy may be more profitable, provided enough other firms follow the same policy. We conclude with a discussion of the impact of economic integration on the sustainability of full employment in the EFf A countries.