Finance, inequality and the varieties of capitalism in post-industrial democracies

Abstract

Despite recent studies showing the impact of finance on rising income inequality in the USA, few studies examine this effect from a comparative perspective. Drawing on the 'Varieties of Capitalism' literature, we contend the relationship between finance and income inequality is amplified in countries with liberal market economies (LME). Based on a panel analysis of 17 OECD countries from 1980 to 2007, we find that growth in financial sectors and the financial labor force is associated with higher income inequality, greater wage disparities and a greater concentration of income in the most affluent households. More importantly, we find the magnitude of these effects are stronger in LME and LME-like countries. Specifically, the effect of finance on income inequality is greater in countries with weak collective bargaining, few labor protections and shareholder corporate governance. Overall, the results indicate the importance of national institutions in the relationship between finance and inequality.