1 LABOUR MARKET INSTITUTIONS AND INCOME INEQUALITY ♣

Abstract: The recent debate on trends in inequality in industrial countries has been marred by the lack of consensus about the relevant concept of inequality. Labour economists are concerned with inequality in earnings, macroeconomists with movements in the wage share, while policy-makers tend to focus on household income inequality. We provide a unifying framework to study the relationship between these three concepts of inequality and their correlation with labour market institutions. Institutional measures exhibit significant associations with inequality, yet they play different roles depending on the extent to which they complement or substitute each other. As a result, we are able to propose a set of inequality minimizing institutions. Institutions that decrease inequality are, however, associated with higher unemployment, and our analysis explores the magnitude of this trade-off, and its implications if a common labour standard is imposed on members of the European Union