The increase in income inequality and household debt of middle- and lower-income households in the USA over several decades led to increasingly fragile financial institutions and set the stage for the most serious recession in the last 60 years. The proximate cause of the economic crisis was the collapse of the housing bubble that caused both the recession that began at the end of 2007 and the financial crisis that erupted in 2008. The drop in GDP in the USA, while steep, was not more severe than in most of the other OECD countries and the macroeconomic policy response was better. Yet the increase in the US unemployment rate was among the steepest. This article examines this failure of US labour market institutions to respond to these policy initiatives and the implications of the analysis for economic policy.
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