Inequality and labour market institutions

This paper takes a fresh look at the causes of the rise of inequality in advanced economies, focusing on the relationship between labor market institutions and the distribution of incomes—which has featured less prominently in recent debates. We find evidence that the erosion of labor market institutions is associated with the rise of income inequality in our sample of advanced economies, notably at the top of the income distribution. Our key findings are that the decline in unionization is related to the rise of top income shares and less redistribution, while the erosion of minimum wages is correlated with considerable increases in overall inequality. There is also some evidence that the broad extension of collective agreements to non-union members is associated with higher inequality, likely owing to higher unemployment. Finally, we confirm that financial deregulation and lower top marginal tax rates are related with higher inequality.