Institute for Research on Labor and Employment

We study the determinants of wage inequality in 16 OECD countries in the last two decades of the twentieth century. We find that these are quite different in the 1980s than in the 1990s. In the 1980s, growing wage dispersion is due to changes in the institutions of the labor market. Declining unionization and declines in the level at which wages are bargained collectively both contribute to widening pay dispersion in the 1980s. In the 1990s, by contrast, increases in pay inequality are due to increasing trade with less developed nations. To the extent that low-pay workers have been protected from rising wage differentials in the 1990s, it has been because of government policy, in the form of social insurance, and not thanks to labor organizations. This is the first study to report that the causes for pay inequality differed between the 1980s and the 1990s.