Why Has Inequality in Weekly Earnings Increased in Canada?

Abstract

Inequality in weekly earnings increased in the eighties in Canada. The growth in inequality occurred in conjunction with three facts. First, real hourly wages of young workers dropped more than 10%. Second, the percentage of employees working 35-40 hours per week in their main job fell and the fraction of employees working 50 hours or more per week rose. Third, there was a growing tendency for highly paid workers to work long workweeks. We argue that any set of explanations of the increase in weekly earnings inequality must reconcile these three facts. Sectoral changes in the distribution of employment by industry and union status explain roughly 30% of the rise in inequality. The reduction in real minimum wages and the decline of average firm size explain very little of the growth in age-earnings differentials. Skill- biased technological change could have increased both the dispersion of hourly wages and the dispersion of weekly hours of work and, thus, is consistent a priori with the movements observed. Yet other factors may have played an equally important--if not more important--role. The growth in competitive pressures, possible shifts in the bargaining power (between firms and labor) towards firms, the greater locational mobility of firms, the increase in Canada's openness to international trade, the rise in fixed costs of labor and possibly in training costs may be major factors behind the growth in weekly earnings inequality in Canada.