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From Maastricht to Brexit by Richard Bellamy and Dario Castiglione

The Impact of Labour Market Dualisation: The Case of Inequality

Tim Vlandas
The London School of Economics & Political Science
Tim Vlandas
The London School of Economics & Political Science

Coordinated Market Economies (CMEs), portrayed in the Varieties of Capitalism (VoC) literature as producing more egalitarian outcomes, have become increasingly unequal. In particular, wage inequality between middle income and low income workers is now higher in some CMEs such as Germany than in the UK, a typical Liberal Market Economy. Similarly, Denmark, characterised by its social democratic welfare regime, now produces more unequal outcomes than countries such as France and Belgium that have Bismarckian welfare regimes.

To solve this puzzle, this paper argues shows that patterns of dualisation across Europe can account for the surprising pattern of inequality. A growing literature has looked at the emergence of labour market and welfare state policies dualisation. However, few studies to date aim to measure dualisation of employment protection and labour market policies systematically and investigate its effect on economic outcomes such as inequality. This paper develops two such measures to account for the dualisation of employment protection and labour market polices. The first measure aims to capture employment protection dualisation and is calculated as the deviation between the employment protection legislation of regular workers and that of temporary workers. The second measure captures the dualisation of unemployment benefits and is calculated as the difference between the replacement of short and long term unemployed.

Panel data regression analysis on a sample of 15 European countries since the 1980s shows the limits of both the Power Resource and VoC approaches in explaining recent trends in wage inequality. Instead, this paper finds robust evidence for a positive relationship between my two indices of dualisation and inequality. Thus, dualisation of employment protection and labour market policies have important economic effects and are likely to further exacerbate the growing divide between insiders and outsiders.
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