Wage Inequality in Europe: the Role of Labour Market and Redistributive Institutions

Abstract

This paper aims at a deeper understanding of the determinants of wage inequality, the most important component of income inequality, in the European countries. We investigate on how wage inequality is affected by government regulation in the labour market and by the redistribution operated by the social protection system, also controlling for the impact of the effect of skillpremium related to technical change. To explain the continuously rising wage inequality in Europe, two regression models of wage inequality are employed each one using a different databases. In the last period, the overall degree of governance of the labour markets does not substantially change, but a different balance between decreasing labour market regulation and increasing redistribution manifest across Europe. While job and wage protection has been eased, income redistribution was strengthened, though its size differs across four clusters of European countries, depending on the majority voting preference for “risk insurance”. Overall, institutional substitution between labour market regulation and income redistribution seems to back the upward trend in wage inequality