Weaker Labour = Higher Inequality

March 9, 2015

by Deepankar Basu

An interesting research paper, to be published in the IMF’s journal Finance & Development (March 2015), finds that lower unionization is associated with higher income inequality in a sample of advanced capitalist economies over the period 1980-2010.

The study “examine[s] the relationship between various inequality measures (top 10 percent income share, Gini of gross income, Gini of net income) and labor market institutions, as well as a number of control variables”, including “other important determinants of inequality identified by economists, such as technology, globalization (competition from low-cost foreign workers), financial liberalization, and top marginal personal income tax rates, as well as controls for common global trends in these variables.” The “results confirm that the decline in unionization is strongly associated with the rise of income shares at the top.” The study also finds that “reductions in minimum wages increase overall inequality considerably.”

The striking findings of the study that investigated the relationship between labour market institutions – union density, minimum wage – and inequality can be summarized as follows: “on average, the decline in unionization explains about half of the 5 percentage point rise in the top 10 percent income share. Similarly, about half of the increase in the Gini of net income is driven by deunionization.”

This study, by IMF economists Florence Jaumotte and Carolina Osorio Buitron, is a welcome addition to the literature on inequality in advanced capitalist countries. Earlier researchers have concentrated on factors like skill-biased technical change and globalization to explain the growing inequality. The IMF study under discussion is among the first to investigate the effect of labour market institutions on income inequality.

The mechanism underlying the paper’s key findings – that lower union density and lower minimum wages – increase income inequality is intuitive and easy to understand. Lower unionization leads to lower bargaining power of labour vis-a-vis capital. Thus, a higher share of the value added is taken by capital, as profit, managerial salaries, CEO pay, etc. Thus, the share of income of the top 10 percent increases, as does other measures of income inequality.

While the findings of this research by IMF economists are interesting, useful and eminently relevant to current academic discussions and policy debates, it is doubtful that it will have any significant impact on IMF’s own policies. In large measure, the IMF continues to espouse neoliberal policies that lowers the bargaining power of labour vis-a-vis capital.

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