Inequality and Earnings Distribution

Abstract

This article documents and provides explanations for levels of and trends in earnings inequality, with a central focus on international differences in these outcomes. It concentrates on OECD countries, which are largely advanced industrialized nations, and typically have similar levels of labour productivity but often very different labour market institutions and changes in the supply of or demand for labour of various skill levels. As a result, one can use international differences to test hypotheses about the role of supply and demand and institutions in influencing levels and trends in earnings inequality. The article first provides an analytical framework for understanding earnings inequality in which labour earnings are distinguished from wage rates. It then places inequality of wage rates in a supply and demand framework, augmented by consideration of labour market institutions. Next, after providing some data on the extent of earnings and wage inequality across countries and over time, it discusses evidence on the determinants of differences and changes in earnings inequality.