When supply meets demand: wage inequality in Portugal

Mário Centeno,Álvaro A Novo

doi:10.1186/2193-9012-3-23

Abstract

Wage inequality in Portugal has increased over the last thirty years, with two distinct periods. The period from 1984 to the mid-90s witnessed strong increases in both upper- and lower-tail inequality. A shortage of skills combined with skill-biased technological changes were at the core of this evolution. Since the mid-90s, lower-tail inequality has decreased, while upper-tail inequality has increased, but at a slower rate. A larger supply of skills and polarization of labor demand contribute to this evolution. Other developed economies share similar trends, but the Portuguese experience shows clearly the role of supply and demand factors in shaping the wage distribution.

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

Introduction

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

Findings

The relative skill supply

Conclusion