Labour market institutions and the personal distribution of income in the OECD

A large literature has studied the impact of labour market institutions on wage inequality. In this paper we examine their effect on overall income inequality. The Gini coefficient of personal incomes can be expressed as a function of the wage differential, the labour share, and the unemployment rate. Labour market institutions then affect inequality through these three channels and their overall effect is theoretically ambiguous. For example, stronger institutions tend to compress wages, thus reducing inequality, and to create unemployment, which spreads the distribution of income. We use a panel of OECD countries for the period 1960-96 to examine these effects. We find, first, that stronger unions and a more generous unemployment benefit tend to reduce income inequality, and, second, that the labour share remains an important determinant of overall inequality patterns. A high labour share emerges as a strong equalising factor, which has partly offset the impact of increased wage dispersion on the distribution of personal incomes in the US.