Rise In Earnings Inequality Research Articles

The Decline and Levelling Off of Earnings Inequality: Boon or Bane for a Growing Economy?

AbstractThis paper investigates evidence on deficits in economic inclusion, focussing on the labour market in Indonesia. Increasing job polarization and an accompanying rise in earnings inequality on account of technological development and globalisation over the past few decades have augmented concerns about the attainability of governments’ perennial objective of inclusive growth. However, there are circumstances in which declining or levelling earnings gaps may be more of a bane than a boon for a country’s long-term economic health. Using the particularly interesting case of Indonesia, which has reduced and subsequently levelled off its earnings inequality in the midst of impressive growth, this paper studies how structural factors and labour market policies influence dynamics of inequality. The study finds evidence of a strong role of structural characteristics, which appears to indicate that reductions in earnings inequality may be more of a bane than a boon for Indonesia’s long-term prosperity. The paper concludes with broader insights and a discussion on policy implications that extend beyond the Indonesian context.

Which Institutions Are More Relevant Than Others in Inequality Mitigation?

During the 1950s, 1960s and most of the 1970s inequality followed declining trends in the most developed and developing countries. However, the inequality trends have been reversed in most countries since the early 1980s. First, inequality started rising in the mid- to late- 1970s in the United States, United Kingdom, Australia and the New Zealand, which were the first among the OECD countries to adopt a neoliberal policy approach. In United Kingdom the increase in inequality was quite pronounced as the Gini coefficient of the distribution of net disposable income rose more than 30 percent between 1978 and 1991, which was twice as fast as that recorded in United States for the same period. The Scandinavian countries and the Netherlands were next to follow where inequality followed a U-shaped pattern. From 1970 to 80, Finland and France also experienced a halt in declining trends in inequality. In Italy inequality rose by 4 points between 1992 and 1995. In 1993 the Gini coefficient for Japan stood at 0.44, which is approximately the same as United States and far higher than the likes of Sweden and Denmark. Most of this increase in income inequality in these industrialised countries is explained by a rise in earnings inequality [Cornia, et al. (2004)]. Since 1989, inequality in the transition countries of Central Europe has also witnessed increasing trends but they remain modest when compared to former USSR and Southeastern Europe where the Gini coefficients rose on average by 10-20 points which is 304 times faster than the Gini in Central Europe. The rise in inequality in this region has been attributed to rise in returns to education following liberalisation [Rutkowski (1999)].

Earnings dynamics and labor market reforms: The Italian case

This paper summarizes statistics on the key aspects of the distribution of earnings levels and earnings changes using administrative (social security) data from Italy between 1985 and 2016. During the time covered by our data, earnings inequality and earnings volatility increased, while earnings mobility did not change significantly. We connect these trends with some salient facts about the Italian labor market, in particular the labor market reforms of the 1990s and 2000s, which induced a substantial rise in fixed‐term and part‐time employment. The rise in part‐time work explains much of the rise in earnings inequality, while the rise in fixed‐term contracts explains much of the rise in volatility. Both of these trends affect the earnings distribution through hours worked: part‐time jobs reduce hours worked within a week, while fixed‐term contracts reduce the number of weeks worked during the year as well as increase their volatility. We only find weak evidence that fixed‐term contracts represent a “stepping‐stone” to permanent employment. Finally, we offer suggestive evidence that the labor market reforms contributed to the slowdown in labor productivity in Italy by delaying human capital accumulation (in the form of general and firm‐specific experience) of recent cohorts.

The Stalled Gender Revolution and the Rise of Top Earnings in the United States, 1980 to 2017

The steep rise of top wages is acknowledged as one of the main drivers of the rise in earnings inequality between workers in most postindustrial labor markets. Yet its relation to gender stratification, in particular to the stagnation in the gender pay gap, has received very little scholarly attention. Using data from the U.S. Current Population Survey, conducted between 1980 and 2017, we provide evidence of the enormous weight that the dynamic at the top of the earnings distribution exerts on the gender pay gap. We also show how this dynamic inhibits the consequences of the countervailing process of gender vertical desegregation. Although developments in gender inequality and in the rise of top wages have drawn extensive scholarly attention and have even penetrated into the public discourse in recent years, the two dimensions of inequality are often perceived as unrelated to one another. Our findings, then, highlight the connection between different forms of inequality—class inequality and gender inequality—a relation that demands much more attention in the new economy.

Firm Pay Dynamics

We study the nature of firm pay dynamics using matched employer-employee and firm financials data from Sweden. To this end, we propose and estimate a statistical model that extends the seminal framework by Abowd, Kramarz, and Margolis (1999b) to account for idiosyncratically time-varying firm pay policies. We validate the model by showing that firm-year pay estimates are systematically related to measures of firm performance. We then apply the model to assess the role of firm pay dynamics in accounting for the rise in earnings inequality in Sweden, to characterize within-firm pay differences over time, to measure firm pay mobility, and to quantify ex-ante versus ex-post heterogeneity in firm pay differences over the firm life cycle.

Earnings inequality and workers’ skills in Italy

The increasing trend of earnings inequality observed in many countries is usually ascribed to a higher premium to skills, commonly proxied by education. Focusing on Italy, a country characterized by a steep rise in earnings inequality since the ‘90 s, we aim at verifying whether this trend is attributable to education. Making use of administrative data about private employees, we carry out Theil decompositions and estimate wage equations to investigate how much of this trend is linked with education and other observable worker’s and firm’s characteristics. We find that the rise in earnings inequality is explained by the “within education” component, rejecting the idea that it is due to a higher premium for the high-skilled. Furthermore, controlling for workers’ and firms’ characteristics in wage regressions – also including workers’ literacy and numeracy recorded in OCED-PIAAC – we find that level and trend of earnings inequality are not explained by these characteristics.

All you need is love? Trade shocks, inequality, and risk sharing between partners

A large literature suggests that growing international trade is among the drivers of rising labor earnings inequality within countries. We contribute to this literature by studying the distributional effects of Germany’s trade integration with China and Eastern Europe. We provide evidence that the trade shock explains 5–18% of the rise in earnings inequality between individual workers. However, when we take risk sharing between partners into account, we find that the inequality-increasing effect of the trade shock is up to 42% lower. Our results therefore suggest that a pure worker-level perspective which ignores risk sharing might give an incomplete picture of the distributional effects of international trade.

Firming Up Inequality*

AbstractWe use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We find that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred due to a rise in the dispersion of average earnings between firms. However, this rising between-firm variance is not accounted for by the firms themselves but by a widening gap between firms in the composition of their workers. This compositional change can be split into two roughly equal parts: high-wage workers became increasingly likely to work in high-wage firms (i.e., sorting increased), and high-wage workers became increasingly likely to work with each other (i.e., segregation rose). In contrast, we do not find a rise in the variance of firm-specific pay once we control for the worker composition in firms. Finally, we find that two-thirds of the rise in the within-firm variance of earnings occurred within mega (10,000+ employee) firms, which saw a particularly large increase in the variance of earnings compared with smaller firms.

Earnings Inequality and Mobility Trends in the United States: Nationally Representative Estimates from Longitudinally Linked Employer-Employee Data

Using earnings data from the U.S. Census Bureau, this paper analyzes the role of the employer in explaining the rise in earnings inequality in the United States. We first establish a consistent frame of analysis appropriate for administrative data used to study earnings inequality. We show that the trends in earnings inequality in the administrative data from the Longitudinal Employer-Household Dynamics Program are inconsistent with other data sources when we do not correct for the presence of misused SSNs. After this correction to the worker frame, we analyze how the earnings distribution has changed in the last decade. We present a decomposition of the year-to-year changes in the earnings distribution from 2004-2013. Even when simplifying these flows to movements between the bottom 20%, the middle 60%, and the top 20% of the earnings distribution, about 20.5 million workers undergo a transition each year. Another 19.9 million move between employment and non-employment. To understand the role of the firm in these transitions, we estimate a model for log earnings with additive fixed worker and firm effects using all jobs held by eligible workers from 2004-2013. We construct a composite log earnings firm component across all jobs for a worker in a given year and a non-firm component. We also construct a skill-type index. We show that, while the difference between working at a low- or middle-paying firm are relatively small, the gains from working at a top-paying firm are large. Specifically, the benefits of working for a high-paying firm are not only realized today, through higher earnings paid to the worker, but also persist through an increase in the probability of upward mobility. High-paying firms facilitate moving workers to the top of the earnings distribution and keeping them there.

Production Networks and Varieties of Institutional Change: The Inequality Upswing in Post-Socialism Revisited

In this article, we elucidate two new mechanisms for the rise in earnings inequality during post-socialist transition. First, the integration of transition country firms into globalized production networks (GPNs) should increase inequality independent of foreign direct investment (FDI). Second, because EU integration hastened the transition from Soviet-era labor-market practices, the distributional effects of private markets and world-economic integration should be larger among acceding countries. A longitudinal analysis of Gini coefficients among sixteen transition countries from 1991 to 2009 supports these interventions: GPN integration increases inequality independent of FDI, and both private markets and world-economic integration have stronger effects in EU transition countries. These results are robust to a host of alternative explanations, to varying operationalizations of the labor-market effects of EU integration, and to alternative estimators. Through counterfactual analysis, we show that inequality would have increased less dramatically in the absence of EU integration.

Saving for post-secondary education in individual development accounts

Low-income people have less access to opportunities for post-secondary education, and the welfare reform in 1996 further limited access for welfare recipients. Since welfare reform, there has been an increasing interest in strategies meant to enhance the well-being of low-income people through and the development of human capital. In this study, we examine how low-income people saved for post-secondary in Individual Development Accounts (IDAs) in a nationwide demonstration. IDAs provide matches for savings used primarily for home purchase, microenterprise, and post-secondary education. We examine how savings outcomes differed between participants who intended to use their savings for post-secondary and other participants. We also look at how these differences in savings outcomes were associated with difference in participant characteristics and in IDA design across different programs in the demonstration. Results indicate that the savings outcomes of education savers were different from other participants. Furthermore, savings for post-secondary moderated some relationships between savings outcomes and other characteristics of participants and of IDA programs. Implications are discussed for policy and social-work practice for using IDAs to promote human-capital development by low-income people. Keywords: post-secondary education, individual development accounts, assets building, welfare reform ********** Both theory and empirical evidence suggest that has a wide variety of positive economic and social effects on individuals, families and society as a whole (Becker, 1993; Beverly & Sherraden, 1997; Center for Women Policy Studies, 2002). Furthermore, the labor-market returns to have increased since the early 1970s (Mishel, Bernstein & Schmitt, 1997; Mishel & Burtless, 1995), and the rise in earnings inequality during the past two decades is closely related to differences in educational attainment (Amott, 1994; Bernhardt & Dresser, 2002). In the meantime, despite the fact that the average level of has increased over the years for both men and women, low-income people and other disadvantaged groups have faced decreasing access to opportunities for post-secondary (Mortenson, 2000). Among the many factors contributing to low access is inadequate financial resources (Boldt, 2000; Gittell, Gross, & Holdaway, 1993). In particular, the increasing costs of college and cuts in need-based financial aid have made post-secondary less affordable for many low-income people (Choitz & Widom, 2003; Mortenson, 2000; Sherraden, 1991). The welfare reform of 1996 has focused on work requirements, further limiting access to post-secondary for welfare recipients. Low-income people may need to put short-term needs ahead of investment in their long-term development of human capital, and it is important for social policy to help them save and invest for their future education. Individual Development Accounts (IDAs) are an approach to help low-income people save and accumulate financial assets for post-secondary education. IDAs are targeted to low-income people and provide incentives and an institutional structure conductive to saving (Schreiner, et al., 2001). IDAs provide participants with matches for savings used for home purchase, microenterprise, and post-secondary education. This paper investigates the following questions: Do IDA participants who intend to use their savings for post-secondary have different savings outcomes than other IDA participants? And if so, what demographic factors and program-design characteristics are associated with the differences? Answers to these questions may provide lessons that will help guide modifications to IDA policy and program design in ways that might improve savings outcomes for those intending to use their IDA for post-secondary education. …

Earnings and education in Portugal, 1985-1991

Purpose– The purpose of this paper is to examine the distributions of earnings and education in Portugal in the early years of European integration, 1985 and 1991, a period when Portugal experienced strong nominal convergence following EU accession.Design/methodology/approach– The paper explores the information provided by relative distribution analysis and covariate (education) decomposition to study the dynamics of the earnings distribution since these methodologies allow for the identification of polarization patterns that might have occurred over the period. More standard methodological instruments are also used as a reference: cardinal measures of inequality and the Lorenz stochastic dominance approach.Findings– The median and average earnings of employees increased and there was also a rise in earnings inequality. Relative to 1985, in 1991 there were more employees with very low earnings but also more 1991 employees with high earnings and there were also more employees at the bottom and top ends of the earnings distribution. The analysis of the relative earnings distribution by level of education reveals substantial differences for the top end of the distributions with the proportion of 1991 employees receiving the highest earnings higher than for the original 1985 cohort. A regional disaggregation confirms that the overall employees’ earnings and education distributions characteristics are determined by the behaviour of coastal regions, while in the non-coastal regions a lower level of inequality is associated with lower levels of median and average earnings and a different polarization pattern.Originality/value– The paper shows that inequality is not a recent phenomenon in the Portuguese economy and thus might be one of the sources of the growth slowdown Portugal is experiencing since the turn of the century and might continue to hamper growth in the future deserving deeper investigation.

Baby booming inequality? Demographic change and earnings inequality in Norway, 1967–2000

In this paper, we demonstrate how age-adjusted inequality measures can be used to evaluate whether changes in inequality over time are due to changes in the age-structure. To this end, we use administrative data on earnings for every male Norwegian over the period 1967–2000. We find that the substantial rise in earnings inequality over the 1980s and into the early 1990s, is to some extent driven by the fact that the large baby boom cohorts are approaching the peak of the age–earnings profile. We further demonstrate that the impact of age-adjustments on the trend in inequality during the period 1993–2000 is highly sensitive to the method used: While the most widely used age-adjusted inequality measure indicates little change in inequality over this period, a new and improved age-adjusted measure suggests a decline in inequality.

Minimum Wages and Earnings Inequality in Urban Mexico

This paper analyzes the contribution of the minimum wage to the well documented rise in earnings inequality in Mexico between the late 1980s and the early 2000s. We find that a substantial part of the growth in inequality, and essentially all of the growth in inequality in the bottom end of the distribution, is due to the steep decline in the real value of the minimum wage. (JEL J31, J38, O15, O17, O18, R23)

Baby Booming Inequality? Demographic Change and Inequality in Norway, 1967-2004

We demonstrate how age-adjusted inequality measures can be used to evaluate whether changes in inequality over time are because of changes in the age structure. In particular, we explore the hypothesis that the substantial rise in earnings inequality since the early 1980s is driven by the large baby boom cohorts approaching the peak of the age{earnings profile. Using administrative data on earnings for every Norwegian male over the period 1967{2004, we find that the impact of age adjustments on the trend in inequality is highly sensitive to the method used: while the most widely used age-adjusted inequality measure indicates that the rise in inequality in the 1980s and 1990s is indeed driven partly by the baby boom, a new and improved age-adjusted measure indicates the opposite, namely that the rise in inequality was even larger than what the inequality measures unadjusted for age reveal.

Baby Booming Inequality? Demographic Change and Earnings Inequality in Norway, 1967-2000

In this paper, we demonstrate how age-adjusted inequality measures can be used to evaluate whether changes in inequality over time are due to changes in the age structure. To this end, we use administrative data on earnings for every male Norwegian during 1967-2000. We find that the substantial rise in earnings inequality over the 1980s and into the early 1990s, is to some extent driven by the fact that the large baby boom cohorts are approaching the peak of the age-earnings profile. We further demonstrate that the impact of age adjustments on the trend in inequality during the period from 1993-2000 is highly sensitive to the method used: while the most widely used age-adjusted inequality measure indicates little change in inequality over this period, a new and improved age-adjusted measure suggests a decline in inequality.

The Rising Instability of U.S. Earnings

The inequality of earnings and of family incomes in the United States has increased since the late 1970s. The large rise in earnings inequality between the 1970s and the 1990s could reflect either a rise in disparity of permanent incomes, a rise in earnings instability, or some portion of both. In this paper, we provide longitudinal measures that separate changes in income inequality into changes that permanently change income to new levels and those that only reflect transitory change. We refer to the latter as changes in “income instability” and discuss how the instability of individual earnings and family income in the United States has evolved— as whole as well as for different types of individuals and families—over the last quarter century. We consider alternative definitions of instability that have been proposed, and establish that all studies find that instability is considerably higher today than in the mid-1970s. This increase in instability is not a recent phenomenon. Earnings instability rose sharply in the late 1970s and early 1980s, then stabilized at these high levels through the recent period, although it may be increasing once again. We also discuss the factors that may be driving this increase in instability.

Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006

We conduct a systematic empirical study of cross-sectional inequality in the United States, integrating data from the Current Population Survey, the Panel Study of Income Dynamics, the Consumer Expenditure Survey, and the Survey of Consumer Finances. In order to understand how different dimensions of inequality are related via choices, markets, and institutions, we follow the mapping suggested by the household budget constraint from individual wages to individual earnings, to household earnings, to disposable income, and, ultimately, to consumption and wealth. We document a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours worked sharpen the rise in earnings inequality before 1982, but mitigate its increase thereafter. Taxes and transfers compress the level of income inequality, especially at the bottom of the distribution, but have little effect on the overall trend. Finally, access to financial markets has limited both the level and growth of consumption inequality.

Rising Earnings Inequality in Sweden: The Role of Composition and Prices

AbstractThe rise in cross‐sectional earnings inequality in Sweden between 1990 and 2002 is decomposed into changes in market prices of observable characteristics, changes in the composition of the labor force across demographic groups and industries, and changes in unobservables. The Swedish experience is then compared with that in the United States. In both countries, the rise in earnings inequality is a consequence of rising upper‐tail dispersion. Contrary to the U.S. experience, where the rise is largely driven by changing market prices of observables and increased residual dispersion, shifts in the Swedish labor‐force composition have contributed positively to the rise in the p90–p50 gap. The rise in the Swedish p99–p90 gap, however, is entirely accounted for by changes in prices and residual dispersion.

Poverty in New York City, 1969-99: The Influence of Demographic Change, Income Growth, and Income Inequality

The four-year rise in the U.S. poverty rate that began with the 2001 recession and the aftermath of Hurricane Katrina has sparked renewed interest in poverty among researchers and policymakers. Policies for addressing poverty are influenced by perceptions of its causes. Accordingly, this article evaluates the impact of several purported causes of poverty in New York City. Using decennial census data for 1970-2000, the authors employ simulations and a decomposition framework to investigate the relationship between poverty and key demographic and economic changes in the city. They find that two demographic changes - the growing percentage of the city's black and Hispanic populations and the increasing share of residents living in female-headed families - are clearly associated with the city's rise in poverty from 1969 to 1979 and the continued high poverty rate from 1979 to 1999. However, when these demographic changes are placed in the context of income growth and expanding income inequality, the study finds that the rise in income inequality plays a larger role in the 1979-99 persistence of poverty than do demographic changes. The authors also explore the influence of changes in earnings inequality on income inequality and poverty. They find a considerable increase in poverty and an expansion of earnings inequality within a key element of the city's population: persons living in full-year working families. The rise in earnings inequality can be traced to the stagnation of wages at the low end of the earnings distribution.