Inequality and Labor Market Coordination

In this paper we argue that to understand the observable associations between institutions and inequality today, it is critical to see the selection of economic institutions, and in particular wage bargaining centralization agreements, as the outcome of a distributive conflict in which inequality itself plays a prominent role. Decreasing inequality facilitated the adoption of encompassing wage centralization agreements during the early 20th century in Europe, thereby creating a long-term association between low inequality and high centralization that, for a large subset of cases, remained stable throughout the century. We develop a theoretical argument as to why inequality should lead to lower levels of coordination and test it against competing hypotheses on the basis of a database on eleven OECD nations between the 1910s and the 1950s.