Full text: The political economy of income distribution: industry level evidence from Austria (156)

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positive effect, higher employment protection legislation has negative effects on the wage 
share; their interpretation of the results is that tighter employment protection legislation leads 
to higher bargaining power of workers and an increase in wages, but it does not increase the 
wage share, since the labour demand is very elastic. IMF (2007) finds negative effects of 
unemployment benefits and the tax wedge. Numerous studies also include direct bargaining 
variables such as union density, strike activity and collective bargaining regimes into their 
empirical analysis. Strike activity has been found to have a positive impact on the wage share 
(Kristal, 2012; Argitis and Pitelis, 2001), while ILO (2011) argues that collective bargaining 
arrangements and minimum wages could have positive effects on the wage share. Union 
density is the most commonly used variable with the best data availability and the most 
robust effect. It has been found to increase the real wage (Choi, 2001) – especially in 
countries with a low level of bargaining coordination (Nunziata, 2005), reduce wage 
dispersion, and limit the size of top income shares. Additionally, stronger labour unions are 
likely to exercise political pressure in favour of redistribution policies, thereby decreasing net 
income inequality (after taxes and transfers) (Jaumotte and Buitron, 2015).
2
 Nevertheless, it 
has been argued that the actual effect of unions may be underestimated in empirical studies 
since collective bargaining coverage greatly exceeds union membership in some countries. 
However, poor data availability limits the employability of this variable (OECD, 2006), at 
least for the sectoral level. Stockhammer (2015) fails to find any statistically significant effect 
of the labour market institution variables such as employment protection legislation, 
minimum wages, unemployment benefit replacement ratio, unemployment benefit duration, 
and the tax wedge. 
The mainstream literature does not control for the effects of welfare state 
retrenchment or financialisation. In the political economy literature, welfare state 
retrenchment is found to be an important determinant of the fall in the wage share (e.g. 
Harrison, 2002; Jayadev, 2007; Onaran, 2009; Stockhammer 2015); however the measure 
used is often only aggregate government spending as a ratio to GDP, and is too broad to 
reflect the details of the welfare reforms essential to the bargaining power of labour. Kristal 
(2012) uses government civilian spending, which nevertheless does not capture the details of 
spending that is particularly important for the social wage and bargaining power of labour 
such as public spending on social protection or health and education.  
                                                 
2
 Although some economists argued that stronger unions can lead to higher unemployment there is very 
little econometric evidence for this hypothesis (OECD, 2006; Jaumotte and Buitron, 2015) .
        

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