IMF Staff Paper: Linkages Between Labor Market Institutions and Inequality

Declines in union density and minimum wages linked to higher inequality

But unions, if nonrepresentative, can also increase unemployment and inequality

Labor market policies should be assessed on a country-by-country basis, considering other policy objectives

In an interview with IMF Survey, Florence Jaumotte and Carolina Osorio Buitron, economists in the IMF’s Research Department and authors of a recently published IMF Staff Discussion Note, Inequality and Labor Market Institutions, explain how their findings shed new light on the sources behind the rise in inequality within advanced economies.

IMF Survey: The rise in inequality and, in particular, the growing concentration of incomes at the top of the distribution, are growing concerns for policymakers in advanced economies. You focus on the role played by labor market institutions. Why?

Osorio Buitron: As part of the IMF’s continuing work on inequality, we wanted to look at inequality from another angle. Traditional explanations for the rise in inequality have been technological progress and globalization. But there is little policymakers can do to reverse these trends, which benefit growth. Labor market institutions are of particular interest because they are more amenable to policy action. Moreover, while high-income countries have been similarly affected by technological change and globalization, inequality in these economies has risen at different speeds. This has led economists to underscore the role of other factors, such as country-specific institutional changes. And there have been significant changes in labor market institutions over the past 30 years—in particular, a strong decline in unionization and, in some countries, an erosion of minimum wages relative to median wages—which stood out as strong candidates to explain the rise in inequality.

IMF Survey: Do your findings imply that all countries should strive for higher unionization and higher minimum wages in order to reduce inequality?

Jaumotte: No, our findings don’t constitute a blanket recommendation for more unionization or higher minimum wages. Other dimensions are relevant, and higher unionization and minimum wages have their limitations. For instance, unions, if they primarily represent the interests of only some workers, can lead to high structural unemployment for some groups, such as the young. Moreover, if minimum wages are too high, they may increase unemployment among unskilled workers and undermine...