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Labour Market Institutions and Income Inequality

Cecilia Garcia-Penalosa () and Daniele Checchi ()

No 470, LIS Working papers from LIS Cross-National Data Center in Luxembourg

Abstract: The recent debate on trends in inequality in industrial countries has been marred by the lack of consensus about the relevant concept of inequality. Labour economists are concerned with inequality in earnings, macroeconomists with movements in the wage share, while policy-makers tend to focus on household income inequality. We provide a unifying framework to study the relationship between these three concepts of inequality and the way in which labour market institutions affect them. Institutions emerge as a key determinant of inequality, yet they play different roles depending on the extent to which they complement or substitute each other. As a result, we are able to propose a set of inequality minimizing institutions. Institutions that decrease inequality are, however, associated with higher unemployment, and our analysis allows us to quantify the magnitude of this trade-off.

Keywords: income inequality; labour market institutions (search for similar items in EconPapers)
JEL-codes: D31 D33 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2008-01
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Published in Economic Policy 23, no. 56 (2008): 601-651. “Labour shares and the personal distribution of income in the OECD”, Economica 2010, 77/307, 413-50

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