Labour Market Institutions and the Personal Distribution of Income in the OECD

while the tax wedge has a negative impact.¹⁶ Note that both coefficients are coherent with theoretical
expectations and are significant when we do not include country dummies, as found in previous work (see
for example Nickell, 1997). More recently, Nickell et al. (2005) have studied the determinants of the
unemployment rate for 20 countries over the period 1961-92, including a list of shocks (labour demand,
total factor productivity, real import, money supply, and real interest rates) and the lagged dependent
variable. They find a positive and significant coefficient on the unemployment benefit (especially the
replacement rate) and the rate of change of union density, a weaker effect for the tax wedge, and an
absence of statistical significance for the employment protection measure.

Table 4 — Determinants of unemployment rate — OLS regressions

robust standard errors - t-statistics in parentheses - * significant at 10%; ** significant at 5%; ***
significant at 1%

To sum up, our results are consistent with previous work and indicate that labour market
institutions are essential determinants of labour market outcomes. Union bargaining power (proxied by
union density and the minimum wage) has an impact on the labour share, wage differentials and
unemployment rates, while the unemployment benefit mainly affects wage dispersion. Capital
accumulation, in terms of both equipment (fixed capital) and educational attainment (human capital) also
have a major impact on our dependent variables.

¹⁶ While the standard expectation is of a positive sign (because a higher tax wedge under wage bargaining leads to net
wage resistance, and therefore increases labour costs and decreases employment), general equilibrium consideration
may lead to the opposite expectation (see Corneo 1995).

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