Richard Gordon's chapter 14 represents an innovative attempt to bring the productivity dimension into discussion of the causes of high unemployment in Europe. According to Gordon, low productivity growth and stable unemployment in the USA and high productivity growth and rising unemployment in Europe are intimately related phenomena, something that has not been properly recognised. In fact I am not sure this is the case, as many of those who defend the European model of labour market organisation with heavy regulation, generous welfare states, etc. would argue that the deregulated Anglo–US model delivers lower unemployment only by generating low productivity ‘McJobs’ in hamburger flipping and the like.

Furthermore, as Gordon's contribution highlights, whether there is indeed a trade-off between unemployment and productivity is actually quite a complex question. The analysis, in essence, represents a reworking of the standard ‘battle-of-the-mark-ups’ model, as in figure 14.2, with productivity rather than the real wage on the vertical axis, and unemployment rather than employment on the horizontal axis. In figure 14.2 the price-setting relationship is downward-sloping in the short to medium run if capital is fixed because of the diminishing marginal product of labour. (The mark-up of prices over marginal cost must also not be too anti-cyclical.) This immediately transfers into an upward-sloping unemployment–productivity trade-off (UPT). However, if the production function exhibits constant returns to scale and capital is variable, then the price-setting relationship is flat, and so is the UPT.