Winds of Change and Policies: The Inequality-Employment Trade-Off in the OECD

Using a data-set of OECD countries from 1980 to 2004, we assess the cross-country evidence on the trade-off between wage inequality and employment performance by relying on Data Envelopment Analysis, a nonparametric technique usually employed in the analysis of productive efficiency. DEA allows for the simultaneous determination of inequality and employment and treats the potential trade-off between inequality and employment in a very flexible way. We attribute the variations in the rates of unemployment and non-employment to two components: the changes due to a variation in wage inequality along the inequality-employment trade-off and the changes in efficiency which simultaneously affect inequality and employment). We find that changes in efficiency are a fairly important component of total changes.