The transition to the knowledge economy, labour market institutions, and income inequality in advanced democracies

The transition from Fordism to the knowledge economy in the advanced democracies was underpinned by the ICT revolution. The introduction and rapid diffusion of ICT pushed up wages for college-educated workers with complementary skills and allowed top managers and CEOs to reap greater rewards for their talents. Despite these common pressures, income inequality did not rise to the same extent everywhere; the Anglo-Saxon countries stand out as being particularly unequal. To shed new light on this puzzle, we carry out a panel data analysis of 18 OECD countries between 1970 and 2007. The analysis stands apart from the existing empirical literature by taking a comparative perspective. We look at the extent to which the relationship between the knowledge economy and income inequality is influenced by national labour market institutions. We find that the expansion of knowledge employment is positively associated with both the 90–10 wage ratio and the income share of the top 1%, but that these effects are mitigated by the presence of strong labour market institutions, such as coordinated wage bargaining, strict employment protection legislation and high bargaining coverage. The study provides robust evidence against the argument that industrial relations systems are no longer important safeguards of wage solidarity in the knowledge economy.