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Industrial & Labor Relations Review 
Volume
60,
Issue
3 2007
Article
5
Labor Market Institutions and Wage Inequality
Winfried Koeniger
∗
Marco Leonardi
†
Luca Nunziata
‡
∗
IZA, University of Bonn,
†
University of Milan,
‡
University of Padua,Copyrightc
2007 Cornell University. All rights reserved.
 
Labor Market Institutions and Wage Inequality
Winfried Koeniger, Marco Leonardi, and Luca Nunziata
Abstract
Theauthorsinvestigatehowlabormarketinstitutionssuchasunemploymentinsurance, unions,firing regulations, and minimum wages have affected the evolution of wage inequality among maleworkers. Results of estimations using data on institutions in eleven OECD countries indicate thatchanges in labor market institutions can account for much of the change in wage inequality be-tween 1973 and 1998. Factors found to have been negatively associated with male wage inequalityare union density, the strictness of employment protection law, unemployment benefit duration,unemployment benefit generosity, and the size of the minimum wage. Over the 26-year period, in-stitutional changes were associated with a 23% reduction in male wage inequality in France, whereminimum wages increased and employment protection became stricter, but with an increase of upto 11% in the United States and United Kingdom, where unions became less powerful and (in theUnited States) minimum wages fell.
KEYWORDS:
labor market Institutions and wage inequality
 
340
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Industrial and Labor Relations Review,
 Vol. 60, No. 3 (April 2007). © by Cornell University.0019-7939/00/6003 $01.00
LABOR MARKET INSTITUTIONS AND WAGE INEQUALITY 
 WINFRIED KOENIGER, MARCO LEONARDI, and LUCA NUNZIATA*
The authors investigate how labor market institutions such as unemployment insur-ance, unions, firing regulations, and minimum wages have affected the evolution of  wage inequality among male workers. Results of estimations using data on institutionsin eleven OECD countries indicate that changes in labor market institutions can ac-count for much of the change in wage inequality between 1973 and 1998. Factors foundto have been negatively associated with male wage inequality are union density, thestrictness of employment protection law, unemployment benefit duration, unemploy-ment benefit generosity, and the size of the minimum wage. Over the 26-year period,institutional changes were associated with a 23% reduction in male wage inequality inFrance, where minimum wages increased and employment protection became stricter,but with an increase of up to 11% in the United States and United Kingdom, whereunions became less powerful and (in the United States) minimum wages fell.
*Winfried Koeniger is Senior Research Associate at IZA, University of Bonn; Marco Leonardi is Assistant Professor in the Department of Labor Studies, Univer-sity of Milan; and Luca Nunziata is Associate Professorin the Department of Economics, University of Padua.The authors thank Daron Acemoglu, Francine Blau,Steve Nickell, and participants at various seminars andconferences for very helpful comments. Financial sup-port of DAAD-Vigoni and ESRC grant RES-000-23-0244(“Improving Methods for Macro-econometric Model-ing”) is gratefully acknowledged.The data and computer programs used for this paperare available from the authors upon request. Contact Marco Leonardi, Department of Labor Studies, Univer-sity of Milan, via Conservatorio 7, 20122 Milan, Italy;marco.leonardi@unimi.it.
age inequality is substantially lower incontinental European countries thanin the United States and United Kingdom,and its evolution over time has differed greatly across countries. The same holds true for theskill (or education) wage premium. Changesin the supply of and demand for skills areunlikely to fully account for these markeddifferences (Acemoglu 2003). A substantialamount of research on wage inequality hasexamined the forces that may shift the rela-tive demand for skills, such as changing tradepatterns and skill-biased technical change.However, since developed economies operatein the same global environment, with inte-grated trade and equal access to technology,exogenous shifts in demand are likely to havebeen fairly similar across these countries; andon the supply side, the proportion of the workforce that is educated has risen throughout these economies, although the educationsystems have expanded at different times.Hence, differences across these countries inthe evolution of wage inequality seem likely to reflect, in part, country-specific variationin the way labor market institutions havechanged.In this paper we use panel data on institu-tions in OECD countries to determine howmuch of the increase in wage inequality can be attributed to changes in institutions within countries. Our study extends previousresearch in several directions. By assessingthe quantitative relationship between institu-tions and male wage inequality, we build onthe literature investigating the determinantsof unemployment rates (see, for example,
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