Micro-mechanisms and Macro-effects: How Structural Change and Institutional Context Affect Income Inequality in Rich Democracies

In this article, the authors develop a taxonomy of the micro-mechanisms by which well-studied macro-level structural changes and institutional contexts distribute income and assess this taxonomy empirically. The authors' taxonomy explicates five distinct micro-mechanisms that operate inside and outside of the labor market to either increase (premiums) or decrease (penalties) income shares. Their analysis of total household income among over 1 million households across 14 countries and 39 years yields four contributions. First, the findings provide "middle-range" evidence regarding the specific micro-mechanisms of each macro-process. Second, premiums are more common micro-mechanisms than penalties, consistent with the phenomenon of "upper-tail polarization" observed in the literature. Third, workplace authority is the most important micro-mechanism operating in the labor market, but the top-income premium is the most important micro-mechanism overall. Finally, the relative importance of the top-income premium is greater for structural change than institutional context, which portends demands for new forms of redistribution.