Whither the Middle Class? Financialization, Labor Institutions, and the Gap between Top- and Middle-Income Earners in Advanced Industrial Societies

Abstract

Recent research shows that financial activities expand the wage gap between affluent and middle-class workers in advanced industrial societies. Furthermore, a well-established literature indicates that differences in labor institutions may be responsible for cross-national variations of income inequality in developed countries. Surprisingly, there is no empirical research examining whether the positive association between financialization and income inequality is conditioned by differences in wage coordination. We contribute to this comparative income inequality literature by testing the claim that wage-setting institutions suppress the inequality-widening effects of finance in advanced industrial societies. To test this contention, we compile an unbalanced panel dataset of 20 developed economies during the years 1988 to 2009. According to our results, financial activities are a robust positive predictor of 90–50 inequality. More importantly, the interaction of financialization and wage coordination returns significant negative associations with the dependent variable. These results are found to be consistent across different estimation techniques and numerous regression parameters.