The drivers of labour income inequality – an analysis based on Bayesian Model Averaging

Abstract

Many Organisation for Economic Co-operation and Development (OECD) countries have seen income inequality rising over the past decade, which has led to a renewed interest among researchers and policy makers in understanding the causes of income inequality. To shed light on this issue, this article investigates the determinants of labour income inequality for a sample of 22 OECD countries. As model uncertainty is likely to be a major issue in such an underpinning, the empirical analysis relies on a Bayesian Model Averaging (BMA) technique. The results suggest that in particular labour, education and tax policies have an important influence on the distribution of labour income.

Keywords:

• labour income
• inequality
• education policy
• labour market policy

JEL Classification:

• D31
• J38

Acknowledgements

This article builds on Less income inequality and more growth – are they compatible? Part 2. The distribution of labour income, Working Papers, No. 925 of the OECD Economics Department. All views expressed in this article are those of the authors and do not necessarily represent the views of the OECD or its member countries. The authors would like to thank J. Elmeskov, J.-L. Schneider, P. Hoeller, R. Duval and F. Pelgrin for useful comments and suggestions and M. Förster and W.-H. Chen for use of their database.

Notes

¹ Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Poland, Spain, Sweden, Switzerland, United Kingdom, United States.

² The unemployment benefit replacement rate is defined as the average replacement rate across two income situations (100% and 67% of average earnings), three family situations (single, with dependent spouse and with spouse in work) and three unemployment durations (first year, second and third year, fourth year and fifth year).

³ In particular, sector-level bargaining seems to entail negative consequences for employment.