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

_IMF News, July 17, 2015_

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## Bibliographic details
- Published: July 17, 2015

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### Overview
- 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.

### Key findings
- 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.

### Mechanisms and interpretation
- 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.

### Policy implications and recommendations
- 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.

### Country-specific guidance and examples
- 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).*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Survey Interview](https://www.imf.org/en/news/search)
- [The IMF and civil society organizations](http://www.imf.org/external/np/exr/facts/civ.htm)
- [Inequality’s toll on growth](http://blog-imfdirect.imf.org/2015/06/22/inequalitys-toll-on-growth)
- [Growth’s secret weapon](http://blog-imfdirect.imf.org/2015/06/15/growths-secret-weapon-the-poor-and-the-middle-class)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/soint071015a_