Title: Wage Inequality in Europe: the Role of Labour Market and Redistributive Institutions
Abstract: The chapter documents the rising trend in wage inequality in Europe and trace it back to a number of factors. Industrial relations have an influence on the degree of wage dispersion, thus being a determinant of macroeconomic performance. Social pacts do not necessarily have a negative influence on the employment level by reducing wage dispersion. In fact, in the case of Scandinavian countries social pacts have been compatible with an increase in wage dispersion. Overall, labour market deregulation and decentralised wage setting increase wage inequality, but the effect can to some extent be compensated by income redistribution policy. In any case, the increase in wage inequality in Europe is inconsistent with those theories (like Krugman’s) holding a negative causal relationship between wage compression and low-skilled employment.