Skills and macro-level economic inequality

This chapter examines cross-national differences in wage inequality rates. Distribution and growth, or equality and efficiency, are treated in a joint framework using data from 22 OECD countries around 2012. Wage inequality declines with the strength of equality-promoting institutions: union density, collective bargaining coverage, active labor market policies and general social spending. Economic wealth grows with efficiency-promoting institutions: business climate, innovation systems and labor market dynamics. Equality and efficiency are weakly inter-related, regarding both institutions and outcomes. Efficiency-institutions reduce employment gaps and skill dispersion - but not wage inequality - more than equality-institutions do, while equality-institutions raise economic output more than efficiency-institutions do. The weak correlation between equality and efficiency is the aggregate outcome of a positive (reinforcing) association among smaller countries and European countries, and a negative (trade-off) association among larger countries and non-European countries. Country (population) size and location are hence important contextual factors in determining wage inequality and growth.