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The Equality Multiplier: How Wage Setting and Welfare Spending Make Similar Countries Diverge

49 Pages Posted: 28 Apr 2012  

Erling Barth

Institute for Social Research, Norway; IZA Institute of Labor Economics

Karl O. Moene

University of Oslo - Department of Economics

Abstract

The complementarity between wage setting and welfare spending can explain how almost equally rich countries differ in economic and social equality among their citizens. More wage equality increases the welfare generosity via political competition in elections. A more generous welfare state fuels wage equality via an empowerment of weak groups in the labor market. Together the two effects generate a cumulative process that adds up to a social multiplier explaining how equality multiplies. Using data on 18 OECD countries over the period 1976-2002 (determined by the availability of the generosity index of welfare spending) we test the main predictions of the model and identify a sizeable magnitude of the equality multiplier. We obtain additional support by using spending data to extend the panel up to 2007, and by applying another data set for the US over the period 1945-2001.

Keywords: welfare state, wage inequality

JEL Classification: H53, I31, J31

Suggested Citation

Barth, Erling and Moene, Karl O., The Equality Multiplier: How Wage Setting and Welfare Spending Make Similar Countries Diverge. IZA Discussion Paper No. 6494. Available at SSRN: https://ssrn.com/abstract=2047280

Erling Barth (Contact Author)

Institute for Social Research, Norway ( email )

Munthesgate 31
0260 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Karl O. Moene

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22855130 (Phone)
+47 22855035 (Fax)

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