LABOR MARKET INSTITUTIONS AND WAGE INEQUALITY
WINFRIED KOENIGER, MARCO LEONARDI, and LUCA NUNZIATA*
The authors investigate how labor market institutions such as unemployment insurance, unions, firing regulations, and minimum wages have affected the evolution of wage inequality among male workers. Results of estimations using data on institutions in eleven OECD countries indicate that changes in labor market institutions can account for much of the change in wage inequality between 1973 and 1998. Factors found to have been negatively associated with male wage inequality are union density, the strictness of employment protection law, unemployment benefit duration, unemployment benefit generosity, and the size of the minimum wage. Over the 26-year period, institutional changes were associated with a 23% reduction in male wage inequality in France, where minimum wages increased and employment protection became stricter, but with an increase of up to 11% in the United States and United Kingdom, where unions became less powerful and (in the United States) minimum wages fell.

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age inequality is substantially lower in continental European countries than in the United States and United Kingdom, and its evolution over time has differed greatly across countries. The same holds true for the skill (or education) wage premium. Changes in the supply of and demand for skills are unlikely to fully account for these marked differences (Acemoglu 2003). A substantial amount of research on wage inequality has examined the forces that may shift the relative demand for skills, such as changing trade patterns and skill-biased technical change. However, since developed economies operate in the same global environment, with integrated trade and equal access to technology,

*Winfried Koeniger is Senior Research Associate at IZA, University of Bonn; Marco Leonardi is Assistant