Do Interactions Between Finance and Labor Market Institutions Affect Wage Distribution?

This article analyzes the linkages between financial liberalization, industrial relations, employment protection legislation and wage inequality for 17 OECD countries over the 1980 to 2009 period. With the help of a fixed effect model with an interacted term, one crucial contribution of this article is to analyze the interacted impact of labor market institutions (i.e. workers' bargaining power and employment protection legislation) on the one hand and financial liberalization on the other hand on wage distribution. We use two different proxies of financial liberalization: the degree of financial openness and the share of stock market capitalization in the GDP. Our results indicate that changes in workers' bargaining power and in employment protection affect wage distribution: increasing financial liberalization is associated with a rise in wage inequality (D9/D1 ratio). Estimates of the marginal effects show that by increasing labor market regulation (i.e. reinforcing workers' bargaining power and increasing employment protection legislation) one also weakens the positive impact of financial liberalization on the increase in wage inequality.