Discussion.

This article responds on comments made in a paper which investigated widening wage differentials in the U.S. and increasing unemployment in Europe. Giuseppe Bertola stressed that the model had been made intentionally simple in order to focus on the effects of differences in labor-market institutions. The hope was that this model would be useful in explaining the component of wage inequality which had been most difficult to rationalize by more conventional approaches. He also said that the increasing idiosyncratic uncertainty which they postulate need not be completely unrelated to stories stressing skill-biased technological progress. Bob Hall observed that there were a number of possible schemes which would effectively vitiate the European anti-firing laws. For instance, the worker and the firm could draw up an agreement at hiring time that gives either party the right to initiate a separation. If this is impractical or illegal, then the firm could try to find a new job for a redundant worker at another firm and thus avoid the penalty imposed for firing a worker. A third possibility is for the firm to diversify either by entering an industry which requires employment growth or by acquiring growing firms.