The varied sources of increasing wage dispersion
Pre-tax and transfer, or market income distribution has grown more unequal over the past four decades and thus has put increasing demands for redistribution on the welfare state. We focus on one aspect of inequality, wage dispersion, investigating the factors that shape the ratio of wages at the 90th percentile to wages at the 10th percentile, and the ratio of wages at the median to wages at the 10th percentile. We analyze data for 21 advanced democracies for varying numbers of years between the 1960s and 2013, depending on data availability for both the dependent and the independent variables. We integrate a focus on structural changes in the economy with a focus on labor market institutions, partisan politics, and education policies. We argue that the same factors shape wage dispersion between both the top and the bottom and the middle and bottom, but some of those factors have a stronger effect on the distance between the bottom and the median income earner. Specifically, higher levels of capital market openness, Third World imports, and immigration are all associated with higher wage dispersion in the 90:10 and the 50:10 ratio, but these effects are much stronger for the 50:10 ratio. Among the countervailing factors, union density, wage coordination, employment legislation that regulates temporary work, and investment in human capital restrain the overall distance and the distance between the bottom and the middle of the income distribution. The effect of regulation of temporary employment, however, is stronger at the bottom.
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