Changes in Wage Inequality

Paul Gregg and Stephen Machin,Bristol UCL

Dec 3-4 2004

Issues

• Big shifts in the structure of wages in the UK since the late 1970s.

• In international context UK, US are countries with biggest changes in wage structure.

• Returns to formal Education/Skills and returns to other soft skills.

Subjects to be Covered

• Trends in wage inequality• Wage Inequality and Intergenerational

Mobility• Shifts in relative demand• Skill-biased technological change• Demand for Low Skill Labour• Returns to Other skills/traits• Policy

Trends in Wage Inequality

What to Look for

• The Tilt

• The Spike

• The Flat Bottom

Trends in Male Wage Inequality, UK Family Expenditure Survey

Hou

rly w

age

inde

x

Year

10th percentile 50th percentile 90th percentile

1975 1980 1985 1990 1995 2000

.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Male Wage Growth by Percentile, 1979-2004

.15

.35

.55

.75

.95

1.15

Ch

ange

0 10 20 30 40 50 60 70 80 90 100Percentile

Change in Full-Time Log(Real Wages) by Percentile 1979-2004

Trends in Male Wage Inequality, UK Family Expenditure Survey

Percentiles Ratios

10th 20th 30th 40th 50th 60th 70th 80th 90th 90-10 50-10 90-50

Men

1975 3.89 4.76 5.39 5.94 6.47 7.10 7.83 8.84 10.89 2.80 1.66 1.68

1980 3.92 4.94 5.66 6.32 7.03 7.82 8.67 9.84 12.10 3.08 1.79 1.72

1985 3.99 5.14 6.03 6.80 7.63 8.55 9.69 11.37 14.14 3.54 1.91 1.85

1990 4.14 5.54 6.55 7.46 8.44 9.61 11.07 13.15 16.43 3.97 2.04 1.95

1995 4.29 5.52 6.60 7.63 8.71 9.86 11.24 13.18 16.54 3.86 2.03 1.90

2000 4.35 5.56 6.57 7.69 8.90 10.33 12.07 14.22 18.09 4.16 2.05 2.03

Women

1975 2.47 2.96 3.39 3.76 4.15 4.52 5.02 5.74 7.28 2.94 1.68 1.75

1980 2.66 3.24 3.56 3.87 4.25 4.68 5.23 6.09 7.87 2.96 1.60 1.85

1985 2.85 3.37 3.70 4.12 4.60 5.21 5.97 7.07 9.17 3.22 1.61 1.99

1990 3.15 3.76 4.21 4.76 5.41 6.10 7.19 8.68 11.41 3.62 1.72 2.11

1995 3.35 3.88 4.45 5.11 5.88 6.62 7.74 9.26 11.94 3.57 1.76 2.03

2000 3.66 4.20 4.83 5.57 6.51 7.62 9.06 10.89 13.86 3.79 1.78 2.13

Longer Run Trends in Male Wage Inequality

Year 90-10 Wage Ratio Year 90-10 Wage Ratio

1886 2.07 1979 2.19

1906 2.34 1982 2.25

1938 2.06 1988 2.45

1970 2.21 1990 2.48

1976 2.07 1997 2.61

Source: New Earnings Survey, British Labour Statistics

International Comparisons

Late 1970s/Early 1980s Mid 1990s Annualised Change

Australia 2.74 (1979) 2.94 (1995) .013

Country 2.27 (1980) 2.40 (1994) .010

Canada 3.46 (1981) 3.77 (1994) .024

Finland 2.44 (1980) 2.53 (1994) .006

Germany 2.38 (1983) 2.25 (1993) -.013

Ireland 4.07 (1987) 4.54 (1994) .067

Italy 2.29 (1979) 2.64 (1993) .022

Japan 2.59 (1979) 2.77 (1994) .001

Sweden 2.11 (1980) 2.20 (1993) .007

UK 2.45 (1979) 3.31 (1995) .054

US 3.18 (1979) 4.35 (1995) .073

Wage Inequality and Intergenerational Mobility 1

Decompose Wage inequality into:

• Changing returns to education

• Inequality within education group

- unmeasured education

- other soft skills/traits

Wage Inequality and Intergenerational Mobility 2

• Intergenerational link - Degree to which family background influences education (or soft skills etc)- The pay off to having that education level, skill or trait in later life

Research present in previous conferences highlighted increasingly strong and causal role of family income on educational attainment

Changes in Educational Wage Differentials

Percent Log(Weekly Wage) Differences(Base: No Educational Qualifications)

1975 1980 1985 1990 1995 1998

Men

Degree or higher 54.2 47.5 54.9 62.8 67.1 71.7

Higher vocational 39.3 31.6 39.0 42.0 29.5 33.5

Teaching and nursing

30.8 25.2 26.4 36.2 41.4 38.4

Intermediate 14.1 14.2 19.9 23.1 23.6 23.8

Women

Degree or higher 70.3 64.1 66.0 78.3 81.7 79.4

Higher vocational 59.1 45.4 52.3 61.3 67.1 61.5

Teaching and nursing

59.5 58.6 59.3 67.4 56.3 42.2

Intermediate 19.4 19.1 25.7 32.1 29.0 33.1

Notes: Calculated from General Household Surveys. For 1975 through 1995, statistics are based on three pooled years with the central year reported in the Table. Derived from statistical regressions holding constant age and age squared.

Changes in Educational Wage Differentials

Changes in Relative Demand and Supply

• ‘Race’ between supply and demand.

• Key question for explaining rising wage inequality is why has the relative demand for more educated/skilled workers gone up?

• Supply responses – shift in intermediate levels with move to GCSE in 1989 knock-on to graduate expansion approx. 5 years later

Hypotheses About What Lies Behind the Relative Demand Shift

Skill-biased technological change

Increased international competition

Decline in importance of labour market institutions

Skill-Biased Technological ChangeBasic idea:New technologies lead to higher productivity, but only some (more skilled) workers possess the necessary skills to operate them.Therefore employers raise demand, and wages, for highly skilled workers who are complements with the new technologies.Lower wages, or lay off, less skilled workers who do not possess the skilled to use the new technologies.

SBTC - Evidence

Requires that skill demand shifts vary systematically with the adoption and introduction of new technologies.

More indirect evidence looking at shifts in relative demand within and between firms and industries.

More direct evidence looking at the relationship between changes in skill demand and observable measures of technology.

Longer Run Changes

The 1970s, 1980s and 1990s are a case in point.

In 1970s relative supply ↑ fast, slower in 1980s, then ↑ faster in the 1990s.

Consistent with pattern of relative wage shifts.

Rising demand for the least skilled jobs

Goos and Manning (2003) paper.

SBTC matters for the top, but right at the bottom of the skill spectrum there is increasing demand for the lowest skilled jobs.

Polarisation between top, middle and bottom

Lousy Jobs, Lovely Jobs

Low Skilled only Benefit in Tightest Labour Markets

  High Employment Areas

  Middle Employment Areas   Low Employment Areas

  1993 2002 % point change

  1993 2002 % point change

  1993 2002 % point change

 

Area Employment Rate

76.6 81.1 +3.5   70.9 73.5 +3.6   64.6 70.3 +5.7  

Men                        

Low quals. 73.9 79.5 +5.6   61.6 62.4 +0.8   52.8 51.6 -1.2  

Low quals. 25-49 79.6 84.9 +4.7   69.8 70.6 +0.8   58.9 53.5 -5.4  

Low quals. Social housing

57.6 65.0 +7.4   38.7 35.7 -3.0   32.2 25.3 -6.9  

Women                        

Low quals 59.1 64.8 +5.7   52.4 50.8 -1.6   46.1 50.3 +4.2  

Low quals. 25-49 61.8 64.5 +2.2   55.7 53.7 -2.0   47.8 50.2 +2.4  

Low quals. Social housing

41.7 45.5 +3.8   32.0 29.1 -2.9   29.8 32.9 +3.1  

Changes at the Top End of the Wage Distribution

There are decade differences in the evolution of wage inequality.

The 1980s was clearly the decade of rapid changes, at all points of the wage distribution

In the 1990s the distribution widened out, but the action is at the top.

The Top Pulling Away in the 1990s0

500

1000

1500

2000

We

ekly

pay

- m

en

1975 1980 1985 1990 1995 2000year

75th percentile 80th percentile85th percentile 90th percentile

91th percentile 92th percentile93th percentile 94th percentile95th percentile 96th percentile97th percentile 98th percentile

99th percentile

Returns to Other Skills/Traits

• Research has also highlighted growing intergenerational transmission not occurring through education

• Intergenerational link- Degree to which family background influences education (or soft skills etc)- The pay off to having that education level, skill or trait in later life

Evidence of positive returns to other skills/traits 1

• Those related to cognitive ability

- IQ

- literacy and numeracy

• Soft skills/personality- Communication- Behavioural maladjustment- Machiavelli score

Evidence of positive returns to other skills/traits 1

• Physical Attributes- Height (1cm = 0.5% on wages, more in LDC)- Physical beauty - Obesity

Conclusion – Bowles Gintis and Osbourne JEL

Wide range of personality and physical traits have been found to influence earnings, however, no one factor is very powerful.

Policy Summary

Policy relevant area where:a) research need to establish the facts of top end, returns to other skills/traits b) amass body of evidence of what interventions change transmission of family background to education and other attainmentsc) assess potential to reduce returns to transmitted traits (scarring or investments)d) redistribution to both reduce penalties and reduce transmission in next generation