Working Paper: NBER ID: w15076
Authors: Erling Barth; Karl O. Moene
Abstract: Equality can multiply due to the complementarity between wage determination and welfare spending. A more equal wage distribution fuels welfare generosity via political competition. A more generous welfare state fuels wage equality further via its support to weak groups in the labor market. Together the two effects generate a cumulative process that adds up to an important social multiplier. We focus on a political economic equilibrium which incorporates this mutual dependence between wage setting and welfare spending. It explains how almost equally rich countries differ in economic and social equality among their citizens and why countries cluster around different worlds of welfare capitalism---the Scandinavian model, the Anglo-Saxon model and the Continental model. Using data on 18 OECD countries over the period 1976-2002 we test the main predictions of the model and identify a sizeable magnitude of the equality multiplier. We obtain additional support for the cumulative complementarity between social spending and wage equality by applying another data set for the US over the period 1945-2001.
Keywords: wage inequality; welfare state; political economy; equality multiplier
JEL Codes: H53; J31; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased wage equality (J31) | Greater welfare spending (I39) |
| Increased welfare generosity (I38) | Compressed wage inequality (J31) |
| Increased wage equality (J31) | Compressed wage inequality (J31) |