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Why the employment rate and income inequality are correlated
When comparing OECD countries, we see a strong correlation between the employment rate and income inequalit y before redistribution: countries with low employment rates have high income inequality before redistribution. What accounts for this correlation? The initial idea is that if many people are excluded from employment, these persons have low incomes, which increases inequalit y ; But the gaps between countries’ employment rate s are particularly significant as regards young people and elderly employees, even though they also appear for all the other age brackets: according to this explanation, income inequali ty is primarily explained by the presence of very low-income young people and pensioners; We can also think that a low employment rate is associated with low labour force skills, especially for low-educat ed people, which lead s to low wage levels for the low-skilled. The latter assumption is compatible with observed facts.
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Patrick Artus
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