9.1.4Institutional Changes: “Deunionization,” Minimum Wage and Deregulation

Fortin and Lemieux (1997) studied the impact of institutional changes on wage inequalities. Their analysis varies from explanations based on supply and demand effects. They acknowledge that between groups and within group inequalities have both increased in 1980s and their sources are still debated. They studied the impact of three institutional changes: (1) the decline in the real value of minimum wage, (2) the decline in unionization rate (3) economic deregulation. They argued that a third of the increase in male and female inequalities during the 1980s is due to these institutional changes. During this decade, the real minimum wage decreased from 45% to 31% of the average manufacturing wage. Unionization fell by 1% each year and this “deunionization” had significant effects on inequalities among men but not among women. For women, the decline in the real value of the minimum wage has contributed to the increase in earnings inequality. The impact of deregulation was small. Fortin and Lemieux’s analysis differs from explanations based on supply and demand effects. They argued that demand explanations cannot really account for certain empirical puzzles. For instance, France and Germany were exposed to similar technological and trade shocks but reported almost no changes in the distribution of wages in the 1980s. These countries have institutions setting wages collectively. In the United States market forces have a greater impact on wages because it is a more market-based economy. Thus, institutional structure cannot explain, by itself, the growth in wage inequality, but can be a source of rising inequality. Therefore, institutional forces simply cannot be overlooked in any serious attempt to understand the recent rise in wages inequality in the U.S. labor market.