Examining the correlation of the level of wage inequality with labor market institutions

Abstract

Abstract. Technological change is responsible for major changes in the labor market. One of the offspring of technological change is the SBTC, which is for many economists the leading cause of the increasing wage inequality. However, despite that the technological change affected similarly the majority of the developed countries, nevertheless, the level of the increase of wage inequality wasn't similar. Following the predictions of the SBTC theory, the different levels of inequality could be due to varying degrees of skill inequality between economies, possibly caused by variations in the number of skilled workers available. However, recent research shows that the difference mentioned above can explain a small percentage of the difference between countries. Therefore, most of the resulting inequality could be due to the different ways in which the higher level of skills is valued in each labor market. The position advocated in this article is that technological change is largely given for all countries without much scope to reverse. Therefore, in order to illustrate the changes in the structure of wage distribution that cause wage inequality, we need to understand how technology affects labor market institutions.In this sense, the pay inequality caused by technological progress is not a phenomenon we passively accept. On the contrary, recognizing that the structure and the way labor market institutions function is largely influenced by the way institutions respond to technological change, we can understand and maybe reverse this underlying wage inequality. Consequently, we would like to examine to what extent the reason behind the increase of wage inequality in some countries but not in others is attributed to the structure and the way the institutions of labor market work. In this article, we will attempt to examine this hypothesis by empirically elaboratingon the relationship between SBTC, inequality and labor market institutions.

Keywords. Wage inequality, SBTC, Minimum wage, Trade unions, Collective bargaining.

JEL. O10, J10, E50.