IMF Survey : IMF Staff Paper: Linkages Between Labor Market Institutions and Inequality

IMF News, July 17, 2015

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Canonical URL: IMF Survey : IMF Staff Paper: Linkages Between Labor Market Institutions and Inequality

Publication date: July 17, 2015
Focus: Role of labor market institutions—unionization and minimum wages—in the rise of inequality in advanced economies.
Approach: Interview summary of IMF Staff Discussion Note, "Inequality and Labor Market Institutions," by Florence Jaumotte and Carolina Osorio Buitron.

Decline in unionization and erosion of minimum wages are associated with rising inequality in advanced economies.
Lower union density is associated with increased income shares at the top, specifically the income share of the top 10 percent of earners.
The decline in unionization appears to explain about half of the observed increase in top income shares and in the Gini of net income.
Erosion of minimum wages (relative to median wages) is correlated in some countries with considerable increases in overall inequality.
Weakening of unions is associated with less income redistribution, likely through reduced influence of unions on public policy.
Lack of representativeness of unions—when unionization is low but collective agreements apply broadly—could lead to higher inequality, likely through higher unemployment.
Beyond union density and minimum wages, no robust evidence was found that changes in other labor market policies are associated with higher inequality.
Other contributors to rising inequality that were controlled for in the analysis include technological progress, globalization, political and social factors, financial deregulation, and declining top marginal tax rates.

De-unionization can weaken earnings for middle- and low-income workers, mechanically increasing the income share of corporate managers and shareholders.
Weaker unions reduce workers’ bargaining power relative to capital owners, increasing the share of capital income—which is more concentrated at the top than wages and salaries.
Weaker unions can reduce workers’ influence on corporate decisions that benefit top earners, such as the size and structure of top executive compensation.
Minimum wages, if eroded relative to median wages, can exacerbate inequality; conversely, if set too high in some contexts they may increase unemployment among unskilled workers and undermine competitiveness.

Findings do not constitute a blanket recommendation for higher unionization or higher minimum wages.
Assessment of labor market reforms should be done on a country-by-country basis, taking into account trade-offs with other macroeconomic priorities.
Considerations include:
- Unions that are nonrepresentative can increase unemployment and inequality for some groups (for example, the young).
- Minimum wages can either help equity by ensuring adequate living standards for low-wage workers or exclude low-wage workers from employment, harming welfare and efficiency.
A multipronged approach across policy areas is required to address inequality, given roles for reductions in top marginal personal income tax rates and financial deregulation alongside labor market institutions.

Sweden: IMF advice recognized that collective bargaining institutions have, on average, delivered wage growth in line with productivity; social partners were encouraged to explore ways to increase wage flexibility at the firm level.
United States: The IMF recently supported raising the minimum wage (context-dependent).
Portugal: The IMF recommended a freeze of the minimum wage after rapid increases during 2007–10 as a way to limit the rise of unemployment.
China: IMF research indicates that minimum wages can either help equity by securing wages for low-wage workers or exclude low-wage workers from employment prospects depending on circumstances.

Source: IMF Survey: IMF Staff Paper: Linkages Between Labor Market Institutions and Inequality (July 17, 2015).