Labor Market Institutions and Wage Inequality in the OECD : A Closer Look at Recent Trends in the Labor Market

Abstract

This thesis studies the impact of labor market institutions on the development of the wage dispersion, using panel data on 20 OECD countries between 1973 and 2012. This thesis uses the empirical model from the paper by Koeniger et al. (2007), “Labor Market Institutions and Wage Inequality” as a starting point, with extended data series and additional countries included to look at the effect of institutions in a longer time frame. The thesis states that the results in Koeniger et al. (2007), where labor market institutions like; overall employment protection, unemployment benefit replacement and duration, tax wedge, union density and coordination and minimum wage, have a compressing effect on wage dispersion both when the time series are revised and when the data set is extended. This thesis also investigates the effect of resent developments in the labor market; where most OECD countries have a higher share of workers on temporary contracts and high immigration rates, on wage dispersion. To this end, I have included a split measure of employment protection legislation (EPL) for temporary and permanent positions and a measure of immigration. When the overall measure of EPL is replaced by the EPL measures for temporary and permanent positions, I find that the two measures have opposite effects on the wage dispersion. I find that stricter levels of EPL for permanent positions are associated with an increase in the wage dispersion; wile stricter levels of EPL for temporary contracts have a compressing effect on the wage dispersion. I also find that higher levels of immigration are associated with an increase in the level of wage dispersion, and that this effect is most evident in the lower half of the wage distribution.