The Institutional Context of Skills-Wages Mismatches

Adam Smith in The Wealth of Nations argued that wage differences are determined not only by competitive factors (compensating differentials) but also by differences in individual abilities and institutions, which are non-competitive. He saw the latter factors as arising from the ‘laws of Europe’, regulating wages, restricting labour mobility and the creation of barriers to entry in internal labour markets (see also Katz and Autor 1999). This is a widely described phenomenon and accepted fact by scholars who criticize the orthodox neo-classical market approach to labour markets and wage determination (e.g. Kerr 1977; Doeringer and Piore 1971). Other institutions impact on the way education/skills are traded for wages which relate to industrial relations systems (Dunlop 1958). In summary, there are two mechanisms which affect wage determination: those mechanisms that reflect economic rationality and other that are more linked to institutions, politics and custom. In this chapter we review selective literature that deals with skill-wage match, then we look at the skill-wage match in European countries and some of the mechanisms that might influence their association or dissociation. Finally, we test a set of hypotheses using log-linear association models developed by researchers in the field of social mobility research, to explore the association between skills and wages at country level, bringing our findings together with other contextual variables relating to the institutional framework in which labour markets operate.