Chapter 10 Earnings Mobility, Earnings Inequality, and Labor Market Institutions in Europe

The economic reality of the 1990s in Europe forced the labor markets to become more flexible. Using a consistent comparative dataset for 14 countries, the European Community Household Panel (ECHP), we explore the degree of earnings mobility and inequality across Europe, and the role of labor market institutions in understanding the cross-national differences in earnings mobility. We study the degree of rank mobility and the degree of mobility as equalizer of long-term earnings. The country ranking in long-term earnings inequality is similar with the country ranking in annual inequality, which is a sign of limited long-term equalizing mobility within countries with higher levels of annual inequality. In long-term earnings inequality, Denmark renders the most mobile earnings distribution with the second highest equalizing effect. The only disequalizing mobility in a lifetime perspective is found in Portugal. With respect to the relationship between earnings mobility and earnings inequality, we find a significant negative association both in the short and the long run. Based on the rankings in long-term Fields mobility and long-term inequality, Denmark is expected to have the lowest lifetime earnings inequality in Europe, followed by Finland, Austria, and Belgium. The Mediterranean countries (Spain and Portugal) are expected to have the highest long-term inequality. With respect to the institutional factors that may be related to earnings mobility, we bring evidence that the deregulation in the labor and product markets, the degree of unionization, the degree of corporatism and the spending on ALMPs are positively associated with earnings mobility.