Labour Market Power and Inequality

Wage inequality is the subject of substantial policy interest and academic study. The traditional academic view of wage inequality is that it is driven by changes in the relative supply of skills, changes in the relative demand for skills, and changes in key labour market institutions (e.g. minimum wages and unions). However, this view has been challenged recently by influential studies highlighting that firms' wage setting behaviour also plays an important role. This highlights that labour market power plays a central role in understanding inequality.

The key novelty of my research is that I will study how labour market power affects the impact of traditional drivers of inequality. Then I will provide an empirical assessment by exploiting policy changes and unique data that are only available in a few countries. Since studying the role of different factors requires different identification strategies and data sets, I will conduct the analysis by providing three separate case studies, each of which focusing on one of the key factors.

In the first case study, I will examine relative demand. Technological change and innovation are key drivers of economic growth, but are also major determinants of relative demand for workers. New technologies might favour skilled workers and so lead wages of higher-skilled workers to increase faster than lower-skilled workers, thereby increasing inequality. When firms have labour market power, introduction of new technology can have a direct effect on firm-level wages, which can amplify the inequality consequences of technological change. I will assess the empirical relevance of this channel by estimating the relationship between firm-level technological change and the firm-level college skill ratio and wage premium. I will use unique survey and administrative data from two countries, Hungary and Norway, where the necessary data linkages are possible.

In the second case study, I will examine relative supply of workers. An important factor affecting this is immigration. I will study the effect of immigration on inequality in the presence of labour market power by exploiting the opening up the Austrian labour market to Eastern European immigrants in 2011, which suddenly increased the access of Austrian firms to cheap labour at the Austrian-Hungarian border. The dramatic increase in supply of Hungarian workers had different effects on different skill groups, and I will study the main consequences of that in a context where wages are set by bargaining between firms and workers. I will combine the radical policy change with firm-level administrative data on vacancy posting, which will allow me to identify which Austrian firms and workers were most exposed to the pool of cheap workers, and so which workers' bargaining power was affected the most.

In the third case study, I will examine the role of institutions. I will study the radical changes in wage setting policies instituted in the early 1990s in Denmark. These reforms will allow me to assess the shift from central bargaining wage setting, where firms had no influence over the wages they paid, to a decentralised wage setting environment where firms can exploit their labour market power in setting wages. The fast implementation of the policy and the unusually high-quality administrative data available in Denmark provide a unique opportunity to understand the main consequences of labour market power.

Each of these case studies provides a good opportunity to study the contribution of labour market power on overall wage inequality and to study the welfare implications of various policy proposals aiming to restrict labour market power.

The primary focus of my research is to understand the roots of inequality and develop policy proposals. By providing data-driven studies on inequality, my proposals would be designed to target reduced inequality without substantially harming economic growth. As a result, I aim to influence and enrich the discussion on equitable growth.

WHO
Given that economic inequality poses serious policy challenges, I expect considerable interest in my research from governments, the broader policy community and NGOs in addition to the academic community. In particular, in the three case studies, I will discuss the welfare consequences of some key regulations targeting labour market power. These policies range from radical ideas such as centralising the wage setting procedure to more modest proposals such as increasing competition by introducing a labour market competition authority.

I expect that the results on institutional change and inequality (case study three) will be of interest to governments as it will provide evidence on the pros and cons of decentralising wage setting. This is particularly interesting for countries in southern Europe (e.g. Italy, Greece), which are pressed to decentralise their wage setting protocols by the EU Commission, and to the Northern countries (e.g. Denmark and Germany) where moving to slightly more centralized wage setting is discussed in some policy circles.

My research will have direct policy implications about how to tackle the roots of inequality. As a result, I expect that public intellectuals and the readership of high-quality newspapers (the Times, Guardian, and the Financial Times) would also be interested in the findings. And more generally I expect the research to contribute robust scientific evidence to the public policy debate on the causes of, and appropriate responses to, wage inequality.

HOW
To maximise the impact of the proposed research each academic paper will be combined with a policy brief that will be posted on my website and disseminated to key stakeholders such as unions and policy institutions. Given the large interest in inequality among journalists, I will also make sure to write non-academic articles in leading newspapers (e.g. Financial Times, The Guardian, The Daily Telegraph) about my findings. My previous experience working with journalists at these newspapers will help me to achieve that goal.

I also aim to publish my work at high readership blogs such as the "Microeconomic Insights", the "Vox-CEPR research-based policy analysis and commentary from leading economists" and the "LSE Blog - Politics and Policy". These blogs are widely read by social scientists and policymakers, and aim to publish plain-English summaries of cutting edge research. I will also produce a 10-12 page policy brief for the Economics for Inclusive Growth which will discuss my key findings on the role of labour market power in determining inequality by the end of the funding period.

I will also ensure that my research reaches key government institutions and NGOs in the UK. I will communicate the key implications of my results at the Low Pay Commission in the United Kingdom, at the Labour Group at the HM Treasury, policymakers at the British Department for Business, Energy and Industrial Strategy, the Institute for Fiscal Studies (IFS).

Finally, I will also disseminate my results at the broader European level. Economic inequality is at the top of the European Commission's agenda. Given that context, I will actively seek out opportunities to present my work to EU policy makers and to researchers at other member states. (I have previously presented my research on minimum wages at the EU Parliament and at the Central Bank of Spain.)