Labor Market Inequalities: A Comparative Political Economy Perspective


Large and growing inequalities in wages, income and employment pose fundamental questions for social scientists and critical challenges for policy makers. In the canonical model of traditional economists, these inequalities are explained by the competitive forces of the market. In this view, it can be assumed that workers of a particular quality receive the same wage (“the law of one wage”) – their marginal product – and therefore there are no significant (surplus) rents to negotiate. . This in turn requires that institutional or policy interventions that produce deviations from competitive outcomes come at the cost of lower employment. The rise in wage inequality over the past decades is explained by the increasing demands of employers for cognitive skills, driven by skill-based technical changes in the workplace, which are not sufficiently met by the supply of workers with relevant skills (Goldin and Katz, 2007; Machin and Van Reenen, 2007; Acemoglu and Auteur, 2011, 2012). Evidence for this competitive market explanation has relied heavily on movements in the education-wage premium (the wage premium of workers with at least a bachelor’s degree) and job polarization (the declining share of workers in routine tasks in the middle of the wage distribution). The central policy recommendation follows directly: eliminate this skills mismatch with education and training programs designed to build a better-skilled workforce.

At the same time, many important empirical works on wage inequality over the past decades have recognized that most contemporary labor markets in rich countries are “largely imperfectly competitive” (Manning, 2011, p. 1030). These imperfections result in employer monopoly and monopsony power, which results in rents that must be negotiated. This view – “the economics of imperfect competition” – is part of a wide range of social science perspectives that place bargaining power at the center of the functioning of labor markets. This literature goes back at least to Adam Smith’s “The Wealth of Nations” (Chapter 8) and includes the work of Sidney and Beatrice Webb at the turn of the last century (Webb and Webb, 1897), the American industrial relations economists of the 1930s-1960s (see Kaufman, 1988) and contemporary scholars of economic sociology, comparative politics and institutionalist traditions (e.g. Korpi, 1985; Granovetter, 2005; Streeck, 2005; Kaufman, 2010).

For the sake of simplicity and convenience, we group this wide range of bargaining power perspectives under a “political economy” umbrella, characterized by the idea that modern labor markets are necessarily made up of institutions, policies and market structures that determine the relative balance of power between employers and employees and that this balance is fundamental to labor market outcomes. We emphasize the social nature of this power by labeling it “institutional bargaining power”. According to this view, rising inequality reflects a combination of increasing market power of employers and decreasing countervailing power of protective institutions and policies that support (directly or indirectly) workers’ interests. It follows from both imperfect market and political economy views that well-designed protective labor regulations can generate significantly more egalitarian outcomes with greater efficiency (eg, job performance).

From a comparative political economy perspective, we argue that the balance of bargaining power between employers and workers must be an essential element of a credible explanation of observed differences in the structure and evolution of national income distributions. . We begin with an overview of wage inequality as measured by conventional earnings percentile ratios and wage growth trends in many developed countries (OECD). We also present new incidence indicators for a smaller set of countries (four English-speaking countries and France), the employment shares of living wages and poverty wages. These indicators are unique in that they can capture both wage quality and inequality at the bottom of the wage distribution and can be easily calculated for narrowly defined demographic groups in any country. We then examine the empirical support for competitive market and political economy explanations of the growth of inequality and low-wage jobs. We critically assess evidence of the education wage premium and employment polarization for wage inequality in the United States, and then show that indices of institutional bargaining power can do an exceptionally effective job. to account for country differences in the distribution of low-end wages, but at the same time. times are not correlated with employment performance across countries, as measured by employment and unemployment rates. Our final analysis of policy implications focuses on institutional and policy changes that could promote inclusive growth by improving wage quality and reducing wage inequality in rich country labor markets.

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