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Labour Market Institutions and the Personal Distribution of Income in the OECD
Daniele Checchi, University of Milan
Cecilia García Peñalosa, CNRS and GREQAM
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ABSTRACT:
We examine what determines differences across countries and over time in the distribution of personal incomes in the OECD. We first model the wage determination process and show that unemployment, the labour share, and the wage differential are all functions of labour market institutions. Next we show that in a model economy with only four types of agents - capitalists, skilled and unskilled workers, and unemployed - the Gini coefficient of personal incomes can be expressed as a function of the above three variables. Labour market institutions hence affect income inequality, though the sign of their impact is ambiguous. Stronger unions and/or a more generous unemployment benefit tend to reduce inequality through reduced wage differentials, a higher labour share, and also higher unemployment. We then use a panel of OECD countries for the period 1970-96 to examine these effects. We find, first, that the labour share remains an important aspect of overall inequality patterns, and, second, that stronger unions and a more generous unemployment benefit tend to reduce income inequality. High capital-labour ratios also emerge as a strong equalising factor, which has in part offset the impact of increasing wage inequality on the US distribution of personal incomes.
SUBJECT AREA:
D31, D33
SUGGESTED CITATION:
Daniele Checchi and Cecilia García Peñalosa,
"Labour Market Institutions and the Personal Distribution of Income in the OECD"
(July 2005).
UNIMI - Research Papers in Economics, Business, and Statistics.
Economics.
Working Paper 4.
http://services.bepress.com/unimi/economics/art4
Paper presented by Marzio Galeotti.
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