No. 2019-06 - Insiders under pressure: Flexible employment and wage inequality

Abstract:

Flexible employment has been on the rise in advanced capitalist democracies. But flexibilization appears to be threatening to some core workers and politically more contested than anticipated in the dualization literature. To explain this puzzle, this paper explores whether the deregulation of flexible employment exacerbates wage inequality among regular workers. Contrary to assumptions of the dualization literature, I argue that some insiders are left worse- off from flexibilization at the margins due to a combination of low-wage competition and adverse future wage prospects. I expect that deregulation generates wage pressure on lower- and middle-income insiders, who need to defend higher wages and have skills disadvantages compared to some high-skilled outsiders. Using LIS wage data for 22 OECD countries between 1985 and 2016, the empirical analysis based on error correction models shows that wage shares of insiders at the lower and middle end of the distribution decline under deregulated temporary employment, while top earners benefit. The findings suggest that flexibilization “at the margins” contributes to rising income inequality beyond dualization, by causing major distributional shifts among insiders in standard employment. The spread of wage risks towards middle class insiders suggest that the political support coalitions behind flexible employment policies are potentially unstable.