Consistent with previous findings in the literature, differences in the way personal characteristics are rewarded in the labour market account for a large share of the observed cross-country differences in wage dispersion. Differences in completed years of education and in returns to education, much more than differences in skill endowments and returns, seem to play a prominent role in this respect. However, the fact that, even after controlling for direct measures of proficiency, the returns to formal education continue to play a very prominent role, suggests that labour market institutions are a crucial factor in explaining the observed international differences in earnings inequality by affecting the way in which certain characteristics are rewarded.