Shaping Earnings Mobility: Policy and Institutional Factors1

By Sologon, Denisa Maria; O'Donoghue, Cathal | The European Journal of Comparative Economics, July 1, 2011 | Go to article overview

Shaping Earnings Mobility: Policy and Institutional Factors1


Sologon, Denisa Maria, O'Donoghue, Cathal, The European Journal of Comparative Economics


Abstract

This paper explores the role of labour market policy and institutional factors in explaining cross-national differences in earnings mobility across Europe in the 1990s using the European Community Household Panel and OECD data on institutional variables. More regulation in both labour and product markets emerge as sources of labour market rigidity, being positively associated with earnings immobility and exacerbating the adverse effects of macro-economic shocks on earnings mobility. Unionization is found to promote earnings mobility, effect, however, counteracted in periods with adverse macroeconomic shocks. Corporatism is found to promote mobility and to counteract the adverse effects of macroeconomic shocks on earnings mobility. The generosity of the unemployment benefit is found to limit the adverse effects of macroeconomic shocks on earnings mobility.

JEL Classification: C23, D31, J31, J60, J50, J08

Keywords: Wage Distribution, Inequality, Earnings Mobility, Labour Market Institutions; Labour Market Policies

(ProQuest: ... denotes formulae omitted.)

1. Introduction

While much of the welfare literature focuses on cross-sectional inequality, the underlying dynamics or mobility of individuals within the distribution has significant implications in relation to welfare associated with being in different parts of the distribution. Earnings mobility represents a very important aspect for understanding earnings inequality.

While earnings mobility can be welfare decreasing as a result of greater risk (Atkinson, Bourguignon, and Morrisson, 1992), it can also be seen as a mechanism for reducing long-term differentials, acting as a bridge between short-term and lifetime earnings inequality. For example, Friedman (1962) indicates that higher earnings mobility

* is sign of a dynamic, more flexible and efficient economy,

* contributes to equality of opportunity;

* ceteris paribus, is expected to make the distribution of lifetime income more equal.

The implication of the latter comment is that through "offsetting mobility", higher mobility can reduce inequality of income measured over a longer period of time, such as lifetime income or "permanent" income, despite a rise in annual inequality, resulting in a positive impact on long-term social welfare. However, it depends on the trade-off between long-term inequality and income variability or risk aversion (Creedy and Wilhelm, 2002; Gottschalk and Spolaore, 2002).

This study focuses on the comparative analysis of earnings mobility in Europe. Of course, while wider income definitions such as disposable income are better determinants of welfare, employee earnings are one of the most important factors of disposable income and thus warren a distinct examination. Also, comparative studies, by comparing and contrasting the situation in different countries can facilitate a greater understanding in relation to the structure of mobility. Nevertheless, the literature in this area is relatively limited with only a few consistent comparative studies on earnings mobility, due to the lack of sufficiently comparable panel cross-country data (Aaberge, Bjorklund, Jantti, Palme, Pedersen, Smith, and Wannemo, 2002; Brukhauser and Poupore, 1997; Brukhauser, Holtz-Eakin, and Rhody, 1997; Fritzell, 1990; OECD, 1996, 1997; Hofer and Weber, 2002; Van Kerm, 2004).

It is not, however, sufficient to describe the structure of earnings mobility. It is also instructive to understand the driving forces behind differences in earnings mobility across countries. Studies examining this are even scarcer. To our knowledge, the only example is Aaberge, Bjorklund, Jantti, Palme, Pedersen, Smith, and Wannemo (2002), comparing income inequality and income mobility in the Scandinavian countries and the U.S. during 1980-1990, to explore some of the factors driving mobility. They find that relative income changes are associated with changes in labour market and marital status in all four countries, but the U. …

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