The Equality Multiplier: How Wage Setting and Welfare Spending Make Similar Countries Diverge

Erling Barth and Karl Ove Moene

No 6494, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The complementarity between wage setting and welfare spending can explain how almost equally rich countries differ in economic and social equality among their citizens. More wage equality increases the welfare generosity via political competition in elections. A more generous welfare state fuels wage equality via an empowerment of weak groups in the labor market. Together the two effects generate a cumulative process that adds up to a social multiplier explaining how equality multiplies. Using data on 18 OECD countries over the period 1976-2002 (determined by the availability of the generosity index of welfare spending) we test the main predictions of the model and identify a sizeable magnitude of the equality multiplier. We obtain additional support by using spending data to extend the panel up to 2007, and by applying another data set for the US over the period 1945-2001.

Keywords: wage inequality; welfare state (search for similar items in EconPapers)
JEL-codes: H53 I31 J31 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2012-04
New Economics Papers: this item is included in nep-lab and nep-pol
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Published - published as 'Quality Multiplier: How Wage Compression and Welfare Empowerment Interact' in: Journal of the European Economic Association, 2016,14 (5), 1011-1037

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