The first option is to defend the wages of the low skilled through minimum-wage laws or paying social replacement incomes which imply minimum wage demands against the private economy.
This is the strategy that most EU countries, Germany in particular, have chosen. It results in mass unemployment that is inefficient and financially unsustainable.
The second option is to pay wage subsidies instead of wage replacement incomes to allow for the wage dispersion necessary for full employment without letting the incomes of the unskilled fall.
This is the strategy chosen by the US with its earned-income tax credit. Edmund Phelps, this year's Nobel laureate in economics, has also long advocated it.
The third option is the Scandinavian way. Here government demand for labor keeps wages high.
While many economists judge Germany's strategy the worst and the US' the best, the Scandinavian strategy can be considered a second-best strategy.
Indeed, it is better to let people clean public parks, nurse children and take care of the old in government facilities than have them do nothing, as in Germany. Even though GDP is artificially inflated, some useful activities are carried out.
Nevertheless, it might be better to let the market decide what kinds of products the low-skilled and less motivated part of the workforce should and could reasonably produce, which speaks for the US way of subsidizing wages.
Thus, the Scandinavian way is more than a mere accounting trick, but it is also less than a truly recommendable strategy for coping with the challenges of globalization.
Hans-Werner Sinn is the director of the Ifo Institute for Economic Research in Munich.
Copyright: Project Syndicate