Minimum wage systems and earnings inequalities: Does institutional diversity matter?

Abstract:

This article explores how the diversity of minimum wage systems affects earnings inequalities within European countries. It relies on the combination of harmonized microdata from household surveys, data on national statutory minimum wages and coverage rates and information on minimum rates compiled from more than 1100 sectoral-level agreements across Europe.

The analysis covers 18 countries over the period 2007–2009. Empirical results confirm the intuition of many practitioners that the combination of sectoral minima and high collective bargaining coverage can be regarded as a functional equivalent of a binding statutory minimum wage, at least for earnings inequalities.

Regression results suggest indeed that both a national statutory minimum and, in countries with sectoral minima, higher collective bargaining coverage is significantly associated with lower levels of (overall and inter-industry) wage inequalities and a smaller fraction of workers paid below prevailing minima. Several robustness checks confirm these findings.