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This paper presents a model with flexible wages in which unemployment of low‐skilled labor is possible in equilibrium, whereas high‐skilled workers are fully employed. Thus, the model can explain why even in countries with flexible labor markets and full employment of skilled labor an employment problem exists at the bottom of the skill spectrum. The model is used to evaluate the impact of technological change and increased skill supply on the employment of low‐skilled workers. It is shown that a switch to technologies with higher skill requirements unambiguously leads to a rise in unemployment of low‐skilled workers. An increase in the supply of high‐skilled labor has a positive effect on the employment level of low‐skilled labor.

A new macroeconomic equilibrium theory is presented which gives a rigorous economic foundation of the notion of employability. Employability depends on the one side on the workers' interactive abilities, but on the other side also on the skill requirements implied by the organizational environment provided by firms. It is shown that the range of abilities which is considered as unemployable by the firms varies with the competitive pressure in the goods market as well as with the used organization methods. Under fairly general conditions the resulting level of equilibrium employment is lower than the efficient level.