"Growth Models, Varieties of Capitalism, and Income Inequality in the Era of Deindustrialisation"

The pervasive rise in earnings and household income inequality across the advanced democracies has been one of the major macroeconomic trends of the post-industrial era. This paper argues and empirically demonstrates that cross-country variation in both post-industrial growth models and income inequality are primarily driven by the political­-economic institutions at the heart of varieties of capitalism. The paper shows that the liberal market economies (LMEs) with consumption-led growth models had higher levels of income inequality than the coordinated market economies (CMEs) with export-led growth models during the Great Moderation, and that differences in the degree of wage coordination were central to this clustering. I emphasise the role of political systems in reinforcing both growth models and patterns of inequality during this period. The paper also argues that the distribution of income, and consequently government redistribution, had important second-order effects on growth models, influencing the extent to which the export-led CMEs could combine household consumption growth with export success. The paper closes by considering the implications of continued deindustrialisation for both growth models and income inequality, particularly in the CMEs. I argue that the CMEs are likely to become more unequal over time, even if they remain export-led, because success in knowledge-intensive services exports is largely premised on labour market flexibility and university-educated labour rather than on more traditional forms of coordination. As we have seen in the LMEs, this institutional configuration drives up income inequality, especially at the top end.