As noted, a well-functioning labour market is critically important in achieving high levels of income equality. A high level of employment sustains the direct provision of market income to households, thereby reducing dependence on government transfers to the unemployed and underemployed, and thus countering social exclusion and marginalization while freeing up resources for social programs and public services. It is possible for countries with high unemployment to maintain relatively equal income outcomes – as was the case for many European countries through the 1990s – but political support for large and ongoing income redistribution from the employed to the unemployed is quite likely to erode over time.

The health of the labour market in terms of sustaining job growth and reducing unemployment is, of course, closely tied to GDP growth, although productivity growth is a key intervening variable. Countries with high productivity growth (such as Germany) will generate fewer jobs for a given amount of economic growth. Strong GDP growth and strong productivity growth are both needed to obtain a reasonable combination of job growth and growth in household income through higher wages.

The unemployment rate is a widely used and important indicator of the extent to which the labour market is working well, but it is very imperfect. It excludes "discouraged" workers such as the long-term unemployed and those working short hours involuntarily. In many European countries, including the Netherlands, Denmark and Germany, many older (mainly male) workers were given relatively generous early retirement and extended unemployment benefits in the 1980s and early 1990s, and they have since given up actively looking for work. From one perspective, this can be seen as social exclusion; from another perspective, as generous compensation via a decent retirement for the victims of industrial and economic restructuring. In any case, the expansion of such schemes generally came to a halt in the 1990s, and falling unemployment in the Netherlands and Denmark over the decade has not been the result of rising "hidden" unemployment. And the relative success in employment terms of the Netherlands and Denmark in the 1990s was not achieved by squeezing out more jobs from a low rate of economic growth.

Table 5
Employment and Unemployment

As shown in Table 5, the unemployment rate in the U.S. fell in the 1990s to its current low level of less than 5% – unseen since the "Golden Age" of the 1950s and 1960s – and employment growth has been strong. The unemployment rate in the UK also fell to levels very low by the standards of the 1980s and early 1990s. But here as in Canada, the employment rate has been falling, indicating that declining unemployment has come in part from labour force withdrawal.

Meanwhile, unemployment rates in Germany and Sweden have remained high and employment rates have fallen, along with those of other continental European countries such as France, Italy and Spain. This reality is captured in the common contrast drawn between the booming and dynamic U.S. "new economy" and "sclerotic," high unemployment Europe. The difference is also routinely captured in the contrast between "flexible" and "rigid" labour markets, with high European unemployment being blamed on rigid wages, tough employment standards and the like.

However, unemployment rates today in the Netherlands and Denmark (and in Austria and Norway) are at U.S. levels, even though these countries are at the polar extreme from the U.S. labour market model, as will be indicated below. Moreover, employment growth in the 1990s has been even more rapid in the Netherlands and Denmark than in the U.S., as shown in the table.

While it is true that the unemployment crisis is very serious in many European countries, it is not true that the line between countries with high and low unemployment rates is the same as that which can be drawn between countries with regulated and deregulated labour markets. The Netherlands and Denmark – with quite highly regulated labour markets and quite equal societies as compared to the U.S., the UK and Canada – have performed as well as or better than the U.S. in terms of employment growth and achieving low unemployment, just as they have in terms of economic and productivity growth in the 1990s.

As of the mid-1990s, social differences between and among the advanced industrialized countries of Europe and North America remained very large, despite the supposedly all-powerful homogenizing influences of globalization and technological change.

Government spending as a percentage of GDP – a measure of the combined size of income transfers to households and the extent of delivery of public as opposed to private services – still differs radically. The role of the government in income redistribution and the provision of public as opposed to market services (public consumption) was twice as important in the two Scandinavian countries as it was in the U.S. (almost 60% of GDP vs. 30%) and about half again as large as in Canada and the UK. Government spending has fallen somewhat from the historic high points – often recorded as recently as the early 1990s, as in the case of Denmark – but particularly in the Netherlands, this partly reflects success on the job creation front and reduced spending on income transfers to the unemployed.

As shown in Table 6, the ratio of public to private consumption in Sweden and Denmark is about .50, meaning that about $0.50 is spent on public services (not including transfers) for every $1 spent directly by households – double the ratio in the U.S. and half again as high as in other countries. (The Netherlands, though, has a small public services sector.)

Real public consumption expenditures – i.e., spending on government services – have continued to grow in all countries in the 1990s, although at rates that suggest falling real per person expenditures in the U.S. and Canada.

The gap between public and private consumption growth has been narrowest in Denmark and Sweden, suggesting only a modest tilt towards market provision in the 1990s rather than a shrinking of the public sector in absolute terms. One in three workers in Denmark are employed in public services, and this ratio has remained constant in the 1990s.⁸

The gap between the "liberal" and "social democratic" poles in terms of public spending appears to have grown, rather than narrowed.

As would be expected, tax receipts as a proportion of GDP closely mirror levels of public spending. The tax burden has remained fairly steady over the 1990s in most countries, though it has fallen modestly in the relatively high tax countries (the Netherlands and Sweden), as well as in the UK. (Denmark, with a rising tax share, replaced Sweden as the highest tax OECD jurisdiction in 1993.) Note that the U.S. tax share has actually grown in the 1990s. The U.S. tax burden increased in the 1990s expansion (from 28.9% of GDP in 1992 to 31.0% in 1999) and personal tax rates were made more progressive by the 1993 reforms which increased the top tax rate from 31% to 39.6%.

Due largely to the cost of servicing the accumulated public debt, current tax burdens in all of these countries are higher now than they were in the mid-1980s and overall, there is no sign of a convergence to low tax levels. (Across the OECD as a whole, the tax burden averaged 37.7% of GDP in 1998, up from 37.0% in 1990 and 35.9% in 1985, and down only slightly from the all-time high of 38.4% in 1994.)

As is widely recognized, progressive taxation of high-income individuals and corporations is most vulnerable to the "downward harmonization" pressures of greater economic integration. This has led many conservative economists and the OECD to prescribe shifting the tax base to flat, or regressive, social security and consumption taxes which are borne mainly by working households. High-spending jurisdictions tend to rely more on these "immobile" tax bases, as seen in the data in Table 6, but Denmark is notable for its high reliance on personal income taxes. Top personal income tax rates, as shown, remain highest in the high-tax countries.

(D) The Structure of Labour Markets: Regulation vs. Deregulation

Collective bargaining coverage remains very high in the four non-Anglo Saxon countries at 70% to 90% of all paid workers, compared to less than 20% in the U.S. and about one in three workers in Canada (see Table 7). Moreover, coverage in the former group has not declined in the 1990s, and collective bargaining remains the dominant mode of setting wages, benefits, hours, and working conditions. This is generally done through industry-level bargaining, loosely co-ordinated at the national level, with a lot of flexibility at the enterprise level.

In Germany and the Netherlands, trade union membership is much lower than bargaining coverage, reflecting the formal and informal extension of collective agreements to non-union workplaces, and the non-compulsory nature of union membership. But the fact remains that the unions negotiate the contracts with employers, and individual employment contracts are very much the exception rather than the rule. Trade union membership as such has increased in the 1990s in Denmark, Sweden and the Netherlands.

Generally speaking, employment standards such as minimum wages and the regulation of hours of work follow the same pattern, although this is hard to capture in indicators, and countries differ in the extent to which bargaining and standards mesh together. In many European countries, including the Netherlands, it is common to legally extend the terms of collective agreements to cover all employers and workers in a particular sector.

Table 7

Collective Bargaining Coverage (% of paid workers in 1994)1
	U.S.	Canada	UK	Germany	Netherlands	Denmark	Sweden
Collective Bargaining Coverage	18	36	47	92	81	69	89
Trade Union Membership	NA	NA	34	29	26	76	91
Gross Unemployment Benefits Earnings Replacement Rate (mid-1990s)2
Single Earner/First Year	28	49	19	34	70	66	72
Average*	14	30	19	26	47	66	28

¹ OECD, Employment Outlook, 1997, Table 3.3.
² OECD, Benefit Systems and Work Incentives, 1999, Table 3.10.
*Average is for three family types, three durations of unemployment and two earnings levels.

(E) Labour Market Institutions and Equity Outcomes

Labour economists have shown that collective bargaining tends to raise the wage floor and to reduce wage and salary differentials among covered workers, implying that overall wage and market income inequality will be strongly reduced if the rate of bargaining coverage is high. Recent OECD analysis has confirmed a robust statistical relationship between high levels of collective bargaining coverage and/or high legislated employment standards and relatively low levels of inequality in terms of the distribution of earnings and the overall incidence of low pay.⁹

The data in Table 8 show that the dispersion of earnings around the median wage – the wage at the exact midpoint of the earnings distribution – is far wider in the U.S. than in the continental European countries. (To the fullest extent possible, the data control for hours worked.) In the U.S., men in the top decile of the wage distribution earn at least twice the median wage, compared to a ratio of about 1.6 in the continental European countries, and the gap between the bottom decile and the median is larger again in the U.S.

As a result, men in the top decile earn a minimum 4.3 times more than those in the bottom decile in the U.S., 3.8 times more in Canada, and 3.4 times more in the UK, compared to a ratio of only 2.2 in Germany and 2.1 in Sweden. These differences are very large indeed. Moreover, they have been growing somewhat in the 1990s only because of increasing inequality in the "liberal" labour markets, the U.S. and the UK. There has been no significant increase in wage inequality in the continental European countries in the 1990s, as indicated by the illustrative D9/D5 ratio for men shown in the table. (See OECD data for further confirmation)

Table 8
Wage Dispersion

Earnings Dispersion (mid-1990s)1	U.S.	Canada	UK	Germany	Netherlands	Denmark	Sweden
Men
D9/D5	2.04	1.73	1.86	1.64	1.66*	1.57*	1.62
D5/D1	2.13	2.18	1.78	1.37	1.56*	1.38*	1.36
D9/D1	4.3	3.8	3.4	2.2	2.6*	2.2*	2.1
Women
D9/D5	2.03	1.78	1.68	1.59	1.66*	1.57*	1.40
D5/D1	1.95	2.25	1.87	1.42	1.56*	1.38*	1.30
Men (1985)
D9/D5	1.84	1.68	1.71	1.66	1.64*	1.54*	1.58
Incidence of Low Paid Employment** (mid-1990s)2
Total	25.0	23.7	19.6	13.3	11.9	-	5.2
Men	19.6	16.1	12.8	7.6	-	-	3.0
Women	32.5	34.3	31.2	25.4	-	-	8.4

¹OECD, Employment Outlook, 1996, Table 3.1. (Data are for weekly or hourly earnings and thus largely account for differences in hours worked.) D9 is the top of the 9th decile, i.e. 10% earn more; D5 is the top of the 5th decile, i.e. median earnings; D1 is the top of the 1st decile, i.e. 10% earn less.
²OECD, Employment Outlook, 1996, Table 3.2.
*Men and Women: No gender breakdown is available.
**Less than 2/3 median earnings of all workers.

Table 8 also shows the incidence of low paid employment in the mid-1990s, defined as employment in a job paying less than two-thirds the economy-wide median wage. As shown, low wage employment by this definition is much lower in Sweden and, to a lesser degree, in the Netherlands and Germany than in the "liberal" labour markets. Again, the differences are profound with about 1 in 4 workers – and 1 in 3 women – working in low wage jobs in North America, compared to only 1 in 8 in Germany and the Netherlands, and just 1 in 20 in Sweden.

The existence of wage floors and the wage compression which results from collective bargaining have been very significant in promoting greater equality between women and men in the labour market and in the wider society.¹⁰ In "liberal" labour markets (the U.S., Canada, the UK), employment rates for women are high, but beyond (limited) public services, women are disproportionately employed in low wage, non-union jobs in smaller firms in private services. In some European countries, employment rates in

public services tend to be higher and, most importantly, the quality of jobs in the small firm, private services sector is directly raised by labour market regulation.

A relatively equal distribution of wage income will obviously tend to produce a relatively equal distribution of household income in a high employment/ low unemployment economy, or in societies where there is relatively generous compensation for unemployment compared to average wages. As shown in Table 9 and was noted above, the overall distribution of household disposable income (post-tax and social transfer income) is vastly more unequal in the U.S. and, to a lesser extent, in the UK than in the Netherlands, Denmark and Sweden. In the U.S., the top 10% of households (equalized for household size) have disposable incomes at least 6.44 times higher than the bottom 10%, compared to a ratio of 4 for Canada and Germany, and 3 or less in the Netherlands, Denmark and Sweden. The Gini shows a similarly wide variation between the two model extremes.

Income inequalities by these measures have increased somewhat from the 1980s to the 1990s. However, as shown in the table, different patterns exist. Income after-tax inequality has steadily increased in the U.S. and, to a lesser extent, in the UK over the past 20 years – despite falling unemployment in the 1990s. In the other countries, the increase in inequality came – if it came at all – in the 1980s and has not continued into the 1990s. Strikingly, there has been no significant increase in after-tax income inequality in the Netherlands and Denmark in the 1980s or 1990s, although there was in Sweden and Germany in the 1980s.

At the end of the millennium, there were profound differences in terms of the equality of household income distribution between and among advanced industrialized countries and few signs of convergence to the liberal model. (Canada is an important exception: by the end of the 1990s, there were signs that the long-standing stability of after-income shares may have come to an end because of developments in the labour market and cuts to Social Assistance and Employment Insurance.)

The injuries of high income inequality under the "liberal" model are, of course, also compounded by the relative lack of access to low-cost public services. In these societies, low disposable income is not complemented by high levels of access to services based on rights of social citizenship. Similarly, the relatively low levels of disposable income inequality in the continental European countries are further mitigated by equality of access to many services.

As also shown in Table 9, the child poverty rate – defined as living in a family with income below 50% of median income – is very low in the Netherlands, Denmark and Sweden, with just 1 in 25 children or less living in poverty, compared to 1 in 7 children in Canada and almost 1 in 4 children in the U.S. The depth of child poverty is also much greater in the high-poverty countries. A recent report from UNICEF clearly links the national level of child poverty in rich countries – both in relative terms and in absolute terms – to both the incidence of low wages and the level of social expenditures.¹¹

The CCSD’s Canadian Fact Book on Poverty 2000 documents the particularly important role of transfers in reducing poverty among all family types. The elderly poverty rate (defined on the same basis as less than 50% of median income) shows a similar pattern, although Canada has done as well here as the most advanced welfare states.

International comparisons of income as a measure of comparative well-being usually fail to adjust not only for income inequality, but also for time worked. GDP per person is a function of productivity (GDP per hour worked) and total hours worked, which will be higher in high employment economies, and where the regular hours of work are high.

Table 10 presents data for GDP per hour worked for our sample of countries, indicating that the productivity gap between the U.S. and other countries is generally much narrower than the income gap. Indeed, workers in Germany and the Netherlands are just as productive as workers in the U.S., so differences in GDP per capita are entirely a function of total hours worked.

Table 10
Income and Productivity

	U.S.	Canada	UK	W. Germany	Netherlands	Denmark	Sweden
GDP per capita at PPP as % U.S. level	100	81	70	75	76	87	70
GDP per hour worked at PPP as % U.S. level	100	85	84	100	101	85	79

Source: OECD Statistical Working Party, Economic Growth in the OECD Area. Are the Disparities Growing? November 1999, Table 2.7, Table 2.

This partly reflects the split between full- and part-time work. As shown in Table 11, the part-time employment rate among women is relatively low in the U.S. and very high in the European countries outside of Scandinavia, particularly the Netherlands. Not all part-time employment is voluntary, and part-time jobs can represent hidden unemployment, as in Canada, where about 1 in 3 women working part-time say that they would prefer full-time work. Further, the "choice" of part-time work is heavily overlaid by traditional family roles, lack of access to child and elder-care services, and discrimination and exclusion of women from good jobs. That said, part-time work is what most women part-timers seek in the labour markets of most countries. High rates of part-time work are thus an ambiguous indicator of relative labour market success or failure.