Wage-Setting Institutions and Wage Inequality in the OECD: An Examination of the Effects of Liberalization of Wage-Setting Institutions and Membership in the EU and EMU on Wage Inequality

Centralized wage-setting institutions are considered to be more effective at reducing wage inequality. In this paper, I offer an expansive cross-national analysis of the effects of recent liberalization in wage-setting institutions on wage inequality in the OECD, taking into special consideration the effects of EU and EMU membership. A qualitative comparison of liberalization occurring within EU, and expressly EMU, and non-EU OECD countries provides deeper insight into the institutional changes occurring across the OECD and within the EU and EMU. New data resources offer the potential to examine the fuller effects of wage-setting institutions due the inclusion of additional components, such as the use of opening clauses and other forms of derogation that add greater flexibility to collective bargaining agreements. These components are reflective of the efforts of trade unions’ and firms’ efforts to adjust to the pressures of global economic integration. Specifically, I examine the effects of changes in wage bargaining coverage, union concentration, centralization and coordination of wage setting, government intervention, the use of opening clauses, and EU and EMU membership on wage inequality between the years 2000-2013. The results show EU membership is associated with an increase in wage inequality at the 90/50 wage differential, while EMU membership similar effects are noticeable for both the 90/10 and 90/50 wage differentials. Wage bargaining centralization only matters in regards to the 50/10 wage differential, and the effect is in the opposite direction of what is expected. Wage bargaining coverage is inconsequential, contrary to much of the literature. The use of opening clauses during periods of crisis matters in regards to the 90/10 and 90/50 wage differentials. Importantly, government intervention and union centralization demonstrate significant importance at all wage differentials. Knowing this information will serve to facilitate policy-making and the determination of which arrangements of wage-setting institutions best serve to address wage inequality in light of increasing global pressures to liberalize.