Labour Markets, Institutions and Inequality

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.

Chapter 11: Public social services and income inequality

Juliana Martínez Franzoni and Diego Sánchez-Ancochea

Subjects: development studies, development economics, economics and finance, development economics, labour economics, social policy and sociology, labour policy


In any market economy, inequality reflects the primary distribution of income between profits and various types of wages. It also reflects the state’s capacity to redistribute resources through taxes and public spending, whether the latter is in the form of transfers, goods or services. Sustained reductions of inequality will involve some combination of ‘market and social incorporation’ (Mart'nez Franzoni and Sánchez-Ancochea, 2012). Market incorporation refers to people’s participation in remunerated work in stable and rewarding conditions. This requires the creation of a sufficient number of formal, well-paying private and public jobs. Even if successful, market incorporation is not a sufficient condition for the reduction of inequality. We can easily envision scenarios under which new formal jobs expand rapidly but wages of skilled workers and profits grow as fast or faster, leading to less equity. Exclusive dependence on market income also heightens exposure to unpredictable risks (accidents and sickness) as well as risks that are hard to cope with on an individual basis (aging and disability), all of which can lead to sharp reductions in living standards. Greater equity in the labour market may also be dependent on improved access to education and health, facilitating the accumulation of human capital for all. This is why expanding social incorporation is extremely important for people’s well-being. Social incorporation refers to people securing their well-being independently of their participation in the labour market.

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