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 World of Work Report 2008: Income Inequalities in the Age of Financial Globalization
INTRODUCTION: Since 2007, the world of work has been hit by a number of global developments, in particular financial turmoil, rising food prices and a shortage of raw materials. This has brought an end to the rapid growth and strong employment performance exhibited by the world economy almost uninterruptedly since the mid-1990s.
Looking forward, a critical issue is the extent to which the current financial crisis and slowdown in the world economy may affect disproportionately low-income groups. This is all the more relevant given that, as this chapter will show, during the high-growth period, income inequality increased in the majority of countries, which may in turn damage the social fabric.
Th e purpose of this chapter is to discuss trends in employment and income inequality over the past two decades, and to assess why rising income inequality should be a matter of policy concern.
A number of the underlying factors behind rising income inequalities will be analysed in detail in later chapters. Chapter 2 examines the role of financial globalization, while Chapter 3 offers a comprehensive quantitative analysis of the role of domestic factors, notably tripartite institutions, in shaping income inequalities, taking due account of trade and other dimensions of globalization.
Chapter 4 considers trends in job quality and the extent to which these trends may have contributed to rising income inequality. Chapter 5 examines redistributive policies through taxes and social transfers. Lastly, Chapter 6 considers Decent Work as a policy package to address excessive income inequalities and support employment growth.
Section A of this chapter provides an overview of developments in the world of work, especially as regards employment growth and labour’s share of income over the past two decades. Section B reviews recent regional and country developments with respect to income inequality.
This includes a special focus on the compensation of executives in selected countries.
The extent to which income inequality is an issue of concern for policy-makers will be discussed in Section C. Lastly, Section D introduces some of the potential factors underlining the trend increase in income inequality and sets up a more detailed discussion in the chapters that follow.
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First published in 2008 by
International Labour Office
CH-1211 Geneva 22, Switzerland
www.ilo.org
Th e International Institute for Labour Studies (IILS) was established in 1960 as an autonomous facility of the International Labour Organization (ILO) to further policy research, public debate and the sharing of knowledge on emerging labour and social issues of concern to the ILO and its constituents – labour, business and government.
CONTENTS
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Editorial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Chapter 1. Trends in employment and inequality . . . . . . . . . . . . . . . . 1
Main findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. Overview of recent developments and employment trends . . . . . . . . . . . . . . . . . . . 3
B. Trends in income inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C. Why is income inequality a matter of policy concern? . . . . . . . . . . . . . . . . . . . . . . 22
D. Bottom line and rationale for the next chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix A. Regional country groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Appendix B. Calculation methods for wage dispersion, wage shares,
productivity and real wage growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Chapter 2. The role of financial globalization . . . . . . . . . . . . . . . . . . 39
Main findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
A. Development of fi nancial globalization and wealth inequality . . . . . . . . . . . . . . . 41
B. Financial markets and pro-poor growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
C. Financial globalization, union bargaining power and the wage share . . . . . . . . . 50
D. Financial globalization and the convergence of capitalisms . . . . . . . . . . . . . . . . . . 52
E. Corporate governance and executive pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
F. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Appendix A. Th e impact of fi nancial market crises on growth and inequality:
An empirical assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Appendix B. Empirical studies regarding pay for performance . . . . . . . . . . . . . . . . . . . 62
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Chapter 3. Labour institutions and inequality . . . . . . . . . . . . . . . . . . 71
Main findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
A. Review of earlier studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
B. Cross-country patterns of labour institutions and income inequality . . . . . . . . . 81
C. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Appendix A. Measures of labour institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Appendix B. Do labour institutions reduce inequality? An econometric analysis 94
Appendix C. Is the inequality-reduction effect of industrial relations
institutions withering away in advanced countries? . . . . . . . . . . . . . . . . 103
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Chapter 4. Changing employment patterns . . . . . . . . . . . . . . . . . . . . 115
Main fi ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
A. No clear link between income inequality and employment growth . . . . . . . . . . . 117
B. Rising non-standard employment as a factor of income inequality . . . . . . . . . . . 118
C. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Chapter 5. Redistribution through taxes and social transfers . . . . . . . . 127
Main fi ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
A. Social transfers, taxation and income inequality: what are the trends? . . . . . . . . 129
B. To what extent do taxes and social transfers shape income distribution? . . . . . . 136
C. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Chapter 6. Decent Work as a coherent policy package . . . . . . . . . . . . 153
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
A. Links between Decent Work and income inequality . . . . . . . . . . . . . . . . . . . . . . . . 153
B. Policy coherence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
C. Areas for further analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
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