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

witnessed by the predicted Japanese inequality index reported in figure 2). We then use these values to
further predict the Gini coefficient.

In figure 3, in addition to the standard prediction (continuous line) we also report the Gini index
replacing the predicted US labour share by the French labour share (long-dashed line) and the US wage
differential by the French wage differential (short-dashed line). The figure illustrates that inequality in the
US would have been 10 Gini points lower if US earnings differentials had been comparable to French
ones. However, the higher labour share experienced by US economy helped reduce income inequality,
which would have been even higher had the labour share declined as in continental Europe.

The reverse situation occurs when we make use of US labour share and wage differentials in
European countries, as we do in figure 4 for the UK and Norway. Not surprisingly, both countries would
have experienced greater inequality had they had the US wage differential. The effect of the labour share,
however, differs. The UK is characterised by a relatively high and stable labour share and therefore the
replacement of US labour share does not affect income inequality, while for Norway its relatively low
labour share was an unequalising force over the period.

In figures 6, 7 and 8 we performed counterfactual simulations by replacing the dynamics of the
main exogenous variables, labour market institutions (union density and unemployment benefit) and
capital accumulation (capital per worker and educational attainment) with those for the US. In figure 5 we
use the US union density and unemployment benefit in the prediction of income inequality for Sweden
and France, while in figure 6 we do the same for Canada and UK. In general, income inequality would
have been higher if European countries had experienced US-type labour market institutions, but there are
country specific variations. In the case of Sweden, a country characterised by high density rates (due to the
so called “Ghent system”, where unions run unemployment benefit schemes on behalf of the state), a
decline of density rates to the US level would have induced a 6 Gini points increase in inequality, while a
similar move would have left unaffected France, where union coverage is high but membership is even
lower than US.²³ The impact of unemployment benefit changes is more limited, because the US-Europe
gap is lower.²⁴ All European countries considered in this exercise would have experienced an increase in
income inequality, and the impact seems stronger in Canada, which is typically considered a US-type
economy but stronger worker protection.

²³ For a comparison of different models of unionisation see Checchi and Lucifora 2002.

²⁴ Looking at table 1, the sample-average replacement rate in US is 0.12, to be compared with 0.19 of Sweden, 0.22
of UK, 0.26 of Canada and 0.30 of France.

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