Labour Markets, Institutions and Inequality
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Labour Markets, Institutions and Inequality

Building Just Societies in the 21st Century

Edited by Janine Berg

Labour market institutions, including collective bargaining, the regulation of employment contracts and social protection policies, are instrumental for improving the well-being of workers, their families and society. In many countries, these institutions have been eroded, whilst in other countries they do not exist at all.
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Chapter 5: Minimum wages and inequality

Patrick Belser and Uma Rani


Throughout the world, millions of workers earn the minimum wage, making it a potentially powerful tool to reduce or contain inequality in the lower half of the wage distribution and to reduce gender pay gaps, as women tend to be over-represented among low-paid workers. The recent theoretical and empirical studies reviewed in our chapter support the idea that carefully designed minimum wage policies can reduce low pay, in equality, and the gender pay gap at little or no adverse cost to employment. While the earlier consensus held that minimum wages always involved trade-offs with employment levels, the new conventional wisdom is that employment effects are unpredictable, often small, and depend on a large number of country-specific factors. In general, the now prevailing view is that statutory minimum wages affect wage distribution but have ‘at best second-order impacts on labour reallocation’ (OECD, 2010, p. 197). To fully exploit the potential of minimum wages requires careful policy design. One aspect concerns the extent of legal coverage. Although minimum wages are nearly universal, in many instances coverage is too weak and excludes those most in need of social protection, such as domestic workers or homeworkers, or those at the bottom of the subcontracting chain. A second aspect is the level at which minimum wages are set. To be effective, minimum wages must be set at a level that guarantees a minimum living wage to all employed and in need of protection, without jeopardizing employment.

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