Diverse Disparities

• Author: Pablo Beramendi,Thomas R. Cusack
• Published date: 01 June 2009
• DOI: 10.1177/1065912908319220
• Date: 01 June 2009
• Subject Matter: Articles

Political Research Quarterly

Volume 62 Number 2

June 2009 257-275

© 2009 University of Utah

10.1177/1065912908319220

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257

Diverse Disparities

The Politics and Economics of Wage, Market, and

Disposable Income Inequalities

Pablo Beramendi

Duke University

Thomas R. Cusack

Wissenschaftszentrum Berlin für Sozialforschung

It is widely thought that among the countries in the Organisation for Economic Co-operation and Development

(OECD), income inequality has become more widespread over the past decades. The authors show that this image is

misleading. The OECD countries remain more diverse in their distributions of labor earnings and disposable income

than they are in their distributions of market income. The larger and persistent cross-national variation in the distrib-

utions of work-related earnings and disposable income is attributable to the role of political actors (such as unions and

political parties) as well as economic institutions. The way in which political parties are able to pursue their goals

varies across forms of income. Political parties’ capacities to shape the distribution of labor earnings is contingent on

the degree of wage-bargaining coordination. In turn, political parties directly affect the distribution of disposable

income through their choices about fiscal instruments.

Keywords: inequality; redistribution; partisanship; economic institutions; political economy

Since Kuznets (1955) pointed to social and politi-

cal factors as the keys to understanding the

changing shape of the income distribution, political

economists have made significant efforts to overcome

the notion that distributive outcomes are a mere

reflection of market processes, both domestic and

international. Indeed, ignoring politics when study-

ing inequality comes at a high analytical price. For

instance, the view, identified by Atkinson (1999) as

the “transatlantic consensus,” that industrialized

countries are converging into higher levels of

inequality because of a combination of skill-biased

technological change and international economic

integration (Phillips 2002) is known to overstate the

uniformity in trends toward inegalitarian societies

because it is surprisingly devoid of politics (Atkinson

1999; Gottschalk and Smeeding 1997, 2000;

Kenworthy and Pontusson 2005; Bradley et al. 2003).

Yet, despite the increasing awareness of the impor-

tance of politics in the study of income inequality, the

field is far from certain about how and when politics

does matter in shaping variations over space and time

in the incidence of inequality. To be sure, the study of

politics as a factor shaping distributive outcomes in

advanced industrial societies has come a long way

since the days in which politics was subsumed

around the median voter’s preferences over a single

policy dimension. The literatures on partisanship and

public policy on one hand, and on the role of eco-

nomic institutions in shaping labor market outcomes

on the other, clearly suggest that the next big hurdle

in disentangling the politics of inequality is to take on

a multidimensional approach and model the interplay

between different sets of political and institutional

factors and the distribution of income. Efforts in this

direction are a new frontier in the comparative politi-

cal economy of redistribution and inequality

(Beramendi and Anderson 2008; Iversen 2006;

Iversen and Wren 1998; Rueda and Pontusson 2000;

Iversen and Soskice 2006). In this article, we join

these efforts to advance our understanding of the

Pablo Beramendi, Assistant Professor of Political Science, Duke

University; e-mail: pablo.beramendi@duke.edu.

Thomas R. Cusack, Senior Research Fellow in Market Processes

and Governance, Wissenschaftszentrum Berlin für Sozialforschung;

e-mail: tom@wzb.eu.

Authors’ Note: Our thanks to Torben Iversen, Magda Mercader,

Jonas Pontusson, Adam Przeworski, David Rueda, Tim Smeeding,

John Stephens, Michael Wallerstein and Sigurt Vitols, as well as

various conference participants for comments and suggestions on

previous versions of this article.

multidimensional character of the politics of inequal-

ity. We begin by documenting the varying patterns of

inequality across different forms of income. We break

the distribution of income into three components,

namely, labor earnings, nonwage income, and taxes and

transfers, and show how each of these dimensions

presents distinctive patterns, both cross-sectionally and

over time. By isolating these different dimensions, we

bring out the puzzle that motivates this article: what

accounts for the relatively large cross-national variation

in wage and disposable income inequality and the nar-

rower range in overall market income inequality?

In what follows, we argue that the key to this puzzle

lies in the differential role that political and institutional

factors play in shaping the distributions of earnings,

market, and disposable income. To identify these dif-

ferential effects, we work through the process by which

inequalities in terms of different income concepts are

linked together, thereby contributing to an area of work

that has received very little attention so far (Atkinson

and Brandolini 2003). Our core findings can be out-

lined as follows. First, while governments are able to

alter labor market outcomes and to directly allocate

resources to different groups in society through taxes

and transfers, they generally lack the capacity to affect

the distribution of nonwage market income. Second,

provided that they hold office for a long period of time,

incumbents of different ideological preferences are able

to condition the levels of inequality directly by setting

the level and types of taxes and transfers. However, the

impact of partisan policy choices on the distribution of

labor earnings is contingent on the behavioral

responses of labor and capital and, therefore, on the

presence of economic institutions regulating them.

Specifically, our findings highlight the importance of

institutionalized cooperation between labor and capital

for the capacity of left-wing parties to moderate eco-

nomic inequality. In line with Lange and Garrett’s

(1985) analysis of the politics of economic growth, we

find that left-wing governments are able to achieve their

goals of a compressed wage distribution only when

capital and labor are able to coordinate their actions

through highly centralized economic institutions.

The rest of this article is organized as follows.

First, we examine the variation, both over time and

across countries, in measures of the distribution of

income in its different forms. Second, we lay out an

argument about how these different income distribu-

tions are shaped by both economic and noneconomic

forces. In the third step, we empirically evaluate the

argument. Finally, we draw together our findings and

their implications.

Is There Growing Economic Inequality

Within the Countries in the OECD?

We focus on the distributions of wages, market

income, and disposable income. Wages are the monetary

reward received in exchange for labor provided an

employer. Market income, of which wages are a com-

ponent, is the broadest measure of the income an indi-

vidual derives from the economic system exclusive of

government transfers. Disposable income reflects the

direct effects, after taxes and transfers, of government

on how market income is ultimately distributed.

Let us turn to the distribution of wages. There are

useful data on this variable for thirteen countries that

are aggregated into five-year averages. These are dis-

played using the 90/10 ratio (in other words, the ratio

the earnings of the top 10 percent of wage earners to

that of the lowest 10 percent of wage earners;

Organisation for Economic Co-operation and

Development 1996).1These can be seen in Table 1.

The pattern in wage inequality over time was

mixed across the OECD countries during the period

from the late 1970s to the late 1990s (Gottschalk and

Smeeding 1997, 2000). Some countries experienced

increased inequality in wage dispersion, and some

witnessed declines. In the United States and the

United Kingdom, labor markets marked by already

by high levels of wage inequality saw a surge upward

through the 1980s and 1990s. Other countries (e.g.,

France, Finland, Denmark) experienced very little

change in levels of wage inequality over the time

periods for which we have data. Moreover, in other

countries, such as Germany and Belgium, low levels

of wage inequality shrank even further.

Wages are an important component of the income

that individuals and households derive from the mar-

ket. Still, they are only a part of total market-derived

income.2Figure 1 presents three-decade averages of

dependent labor income as a share of total household

market-based income.3Wage earnings constitute

about 70 percent of household income, although this

varies. Correspondingly, the average of 30 percent of

this income derived from sources other than depen-

dent employment constitutes a significant part of

market income. Such flows are distributed differently

than wages. The implications are clear: the overall

market-based distribution will be different from the

wage distribution, and the forces shaping it will, at

least in part, be dissimilar.

In contrast to the mixed picture on cross-national

developments in wage earnings distributions, the pat-

tern in the distribution of market income is uniform

258 Political Research Quarterly