Policymakers in many OECD countries are increasingly concerned about high and rising inequality. A large and growing body of evidence has helped policymakers better understand the causes of both high and rising wage inequality, and two key sets of explanations have emerged.

For the first set, which focuses on labor market institutions, there is general agreement that changes in minimum wages, unionization, and employment protection legislation, or differences in them across countries, can explain a substantial portion of the increase or cross-country variation in wage inequality.

For the second set of explanations, which focuses on the role of skills, there are two competing strands of research. One strand, with many supporters, finds that changes in the demand for and supply of skills have caused rising wage inequality within countries over time. Yet another strand has found that skills explain little of the differences in wage inequality across countries.

Does this challenge the received wisdom on the relationship between skills and wage inequality? No, because this recent research fails to account for the fact that the price of skill (and thus wage) inequality is determined to a large extent by the match of skill supply and demand.
 

To find out whether skills matter for wage inequality, read Stijn Broecke's full article Do skills matter for wage inequality?

...................................................................................................................................................

Read further articles on wage inequality:
 

• The minimum wage versus the earned income tax credit for reducing poverty (Deutsch) by Richard V. Burkhauser

• Measuring income inequality (Deutsch) (Español) by Ija Trapeznikova

• Wage compression and the gender pay gap (Deutsch) by Lawrence M. Kahn

• Income inequality and social origins (Deutsch) (Español) by Lorenzo Cappellari

• Equal pay legislation and the gender wage gap (Deutsch) by Solomon W. Polachek

Read related commentaries:
 

• Minimum wages hurt young people by Charlene Marie Kalenkoski

• Does increasing the minimum wage reduce poverty in developing countries? by T. H. Gindling

• Wage subsidies may not help to increase employment among older workers by Bernhard Boockmann

• Equal pay legislation and the gender wage gap by Solomon W. Polachek

• Commentary on high minimum wage proposals by Daniel S. Hamermesh

...................................................................................................................................................

Gender gaps in wages and leadership positions are large—
Why, and what can be done about it?

Find out in our video:

...................................................................................................................................................

Did you know IZA World of Labor has a new
LinkedIn page?

Join our community.

...................................................................................................................................................

Top stories

News and views in labor economics