CESifo Working Paper No. 1608

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

Abstract

We examine the determinants of differences across countries and over time in the distribution
of personal incomes in the OECD. The Gini coefficient of personal incomes can be expressed
as a function of the wage differential, the labour share, and the unemployment rate, hence
labour market institutions are an essential determinant of the distribution of income, although
the sign of their impact is ambiguous. We use a panel of OECD countries for the period 1970-
96 to examine these effects. We find, first, that the labour share remains an important
determinant of overall inequality patterns, and, second, that stronger unions and a more
generous unemployment benefit tend to reduce income inequality. High capital-labour ratios
also emerge as a strong equalising factor, which has in part offset the impact of increasing
wage inequality on the US distribution of personal incomes.

JEL Code: D31, D33.

Keywords: income inequality, labour share, trade unions.

October 2005

We thank the participants to the seminars at IZA-Bonn, Universidad Autonoma (Barcelona),
IGIER Bocconi, Florence, Milan University, Freie Universitat,, the Institute of Industrial
Economics Stockholm, the Hebrew University of Jerusalem, and at the SASE and ECINEQ
conferences,. We especially thank Andrea Bassanini, Andrea Cornia, Peter Gottschalk and
Claudio Lucifora for helpful comments. Daniele Checchi gratefully acknowledges the
financing of the Italian Ministry of Education (Cofin n. 2003137385); Cecilia Garda-
Penalosa’s research was partly supported by the Institut d’Economie Publique in Marseille.

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