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.