Inequality and Institutions: The Case of Economic Coordination

Abstract

The understanding of observable associations between institutions and inequality today requires a better grasp of the process driving the selection of economic institutions, in particular wage bargaining centralization agreements, as the outcome of a distributive conflict in which inequality itself plays a prominent role. Low levels of inequality facilitated the adoption of encompassing wage centralization agreements during the early twentieth century in Europe, thereby creating a long-term association between low inequality and high centralization that, for a large subset of cases, remained stable throughout the century. We develop a theoretical argument as to why inequality should lead to lower levels of coordination and test it against competing hypotheses on the basis of a database on 11 OECD nations between the 1910s and the 1950s.