Abstract
Wage inequality in Portugal increased over the last quarter of century. The period from 1982 to 1995 witnessed strong increases in both upper- and lower-tail inequality. A shortage of skills combined with skill-biased technological changes are at the core of this evolution. Since 1995, lower-tail inequality decreased, while upper-tail inequality increased at a slower rate. The supply of high-skilled workers more than doubled during this period, contributing significantly to the slowdown. Polarization of employment demand is the more credible explanation for the more recent evolution. As in other developed economies, for instance Germany and the United States, we show that institutions played a minor role in shaping changes in inequality.
Highlights
The debate over the level and trends in wage inequality in developed economies has evolved around a continental divide
Demand, and institutions framework, we study the determinants of inequality in the period from 1984 to 2009
5 Conclusion Supply and demand market forces resulted in an increase in wage inequality, in particular at the top of the wage distribution
Summary
The debate over the level and trends in wage inequality in developed economies has evolved around a continental divide. The Portuguese experience resembles the evolution of inequality in the U.S Both have a low elasticity of substitution between high and low skills, implying a strong reaction of the wage skill premium to relative supply conditions They share negative price effects in the more recent period associated with the reduction in lower-tail inequality (minimum wage developments). For overall male upper-tail inequality, the price effect induced by wage changes from 1995 to 2009 with 1984 composition, -5.1 log points, is obtained by subtracting the values in 1984 of the 2009 counterfactual curve from the 1995 counterfactual curve. Not as pronounced as in the upper-tail, composition effects play a larger role in the later period, which is consistent with the evidence gathered for the educational and age changes that characterized the Portuguese economy. For lower-tail inequality, a countervailing composition effect ends up canceling most of the reduction in residual inequality implied by the price effect
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