Low Pay in Rich Countries: Institutions, Bargaining Power, and Earnings Inequality in the U.S., U.K., Canada, Australia and France

This paper was revised December 2021.

Authors:

David R. Howell, The New School

Abstract:

The canonical explanation for four decades of American wage stagnation and rising inequality has been that competitive market forces, driven by new computer-driven production technologies, have sharply reduced the demand for workers without good college degrees, complemented by the downward wage pressures from increasing global competition. If this is right, there should have been similar patterns of pay stagnation and inequality in other rich countries. This paper explores evidence for an alternative explanation that shifts the focus to profound shifts in the balance of bargaining power between employers and workers, driven by political choices that weakened protective labor regulations. National pay distributions are shown to be strikingly different across the rich world, with country rankings that have remained, with few exceptions, stable for many decades – whether measured by conventional inequality indicators for all workers (e.g., the OECD’s 50-10 earnings ratio and low-pay rate) or by new measures of the incidence of poverty- and decent-pay (Howell, 2019; 2021), To explain this extensive range and stability of pay structures, an index of Institutional Bargaining Power (IBP) is developed from conventional indicators of wage-setting institutions and social protection policies. Like pay distributions, cross-country IBP scores are found to show wide variation and almost perfectly stable country rankings since the 1980s. A close statistical correspondence is shown between the IBP index and pay structures for the five-country sample, with particular attention to the incidence of poverty-pay and decent-pay jobs for young (18-34) male and female workers without a college degree. A similarly tight statistical fit is shown between the IBP index and conventional OECD inequality measures for a much larger set of rich countries. While other factors surely matter, the inequality of national pay structures and closely associated measures of earnings quality of jobs in the bottom half of the distribution can be nearly entirely accounted for by the inclusive nature of national regulatory regimes directed at earnings and employment protection.