Rising Wage Inequality Research Articles

WAGE RISK, EMPLOYMENT RISK, AND THE RISE IN WAGE INEQUALITY

AbstractU.S. male residual wage inequality rose, and the employment rate fell between 1983 and 2013. Using a structural labor market model, we show that rising idiosyncratic wage risk and lower taxes at the bottom of the earnings distribution are the main forces behind rising wage inequality. The former contributes to the falling employment rate. Falling real wages and rising disability risk further depressed employment of workers without a college degree and rising exogenous job destruction depressed employment of workers with a college degree. Higher idiosyncratic risk entails large welfare losses with the largest losses among workers without a college degree.

The Growing Importance of Social Skills for Labor Market Outcomes Across Education Groups

Abstract Using the 1979 and 1997 waves of the National Longitudinal Survey of Youth, this paper shows that the growing return to social skills documented by Deming (2017. “The Growing Importance of Social Skills in the Labor Market.” Quarterly Journal of Economics 132 (4): 1593–640) has been largely concentrated on college-educated workers, rather than on high school-educated workers. These findings are corroborated by the pronounced occupational sorting of college-educated workers into occupations requiring high levels of social skills. Moreover, the wage premium for college-educated workers employed in these occupations has increased markedly. Our empirical evidence provides one possible source of rising wage inequality within and between education levels.

Revisiting capital-skill complementarity, inequality, and labor share

This paper analyzes the quantitative contribution of capital-skill complementarity in accounting for rising wage inequality, as in Krusell, Ohanian, Rios-Rull, and Violante (KORV, 2000). We study how well the KORV framework accounts for more recent data, including the large changes in labor's share of income that occurred after the KORV estimation period ended. We also study how using information and communications technology (ICT) capital as the complementary capital stock affects the model's implications for inequality and overall model fit. We find significant evidence for continued capital-skill complementarity across all model permutations we analyze. Despite nearly 30 years of additional data, we find very little change to the original KORV estimates of substitution elasticities when the total stock of capital equipment is used as the complementary capital stock. We find much more capital-skill complementarity when ICT capital is used. The KORV framework continues to closely account for rising wage inequality through 2019, though it misses the three percentage points decline in labor's share of income that has occurred since 2000.

What’s behind increasing wage inequality? Explaining the Italian case using RIF-OLS

This paper aims to identify how and to what extent the Italian labour market structure, in terms of job composition and institutional changes, shaped the dynamics of wages and wage inequality in the decade between 2007 and 2017. We investigate the main determinants behind the rise in wage inequality in Italy by using Recentered Influence Function (RIF) regressions. This econometric approach allows—on the one hand—to directly assess the effects on the unconditional distribution and on “beyond the mean” statistics, like the Gini coefficient. On the other, it decomposes inequality into endowment and wage effects, following the standard Oaxaca-Blinder technique. We observe that working structures and institutional changes—contractual arrangements (permanent vs temporary contracts) and working hours (full-time vs part-time)—are the main factors in explaining the deterioration in wages at the bottom of the income distribution scale, and the consequent increase in wage inequality.

Job Polarization and the Declining Wages of Young Female Workers in the United Kingdom*

AbstractWe examine whether the decline of routine occupations contributed to rising wage inequality between young and prime‐age non‐college educated women in the UK over 2001‐2019. We estimate age, period, and cohort effects for the likelihood of employment in different occupations and the wages earned therein. For recent generations, cohort effects indicate a higher likelihood of employment in low‐paying manual jobs relative to high‐paying abstract ones. Cohort effects also underpin falling wages for post‐1980 cohorts across all occupations. We find that the latter channel, rather than job polarization, has been the main driver of rising inter‐age inequality among non‐college females.

Did a successful fight against COVID-19 come at a cost? Impacts of the pandemic on employment outcomes in Vietnam

Despite its low middle-income status, Vietnam has been widely praised for its success in the fight against early waves of the COVID-19 pandemic, with a low mortality rate of approximately 100 deaths out of a population of less than 100 million by the end of 2020. We add to the emerging literature on COVID-19 effects on the labor market for poorer countries by analyzing rich individual-level data from Vietnam’s Labor Force Surveys spanning 2015 to 2020. We find post-pandemic increases in unemployment and temporary layoff rates alongside decreases in employment quality. Monthly wages declined even as the proportion of workers receiving below-minimum wages substantially increased, contributing to sharply rising wage inequality. Our findings suggest that more resources should be allocated to protect vulnerable workers, especially as the pandemic continues to cause increasingly severe damage to the global economy.

Workplace heterogeneity and wage inequality in Denmark

SummaryWage inequality is on the rise in most developed economies, and this phenomenon has fostered a growing body of research on its potential drivers. Using German data over the period 1985–2009, Card et al. (The Quarterly Journal of Economics 2013, 128(3), 967‐1015) argue that rising workplace heterogeneity has contributed substantially to the rise in wage inequality. I revisit their findings in two ways. First, because the generalization of their findings remains an open question, I apply their methodological approach to Danish register data and test whether rising workplace heterogeneity explains a significant share of the rise in wage inequality in Denmark. I find that, contrary to Germany, workplace heterogeneity remained practically stable over time, and this pattern contributed slightly negatively to the rise in wage inequality. Second, I complement Card et al.'s (2013) methods with the variance decomposition exercise proposed by Song et al. (2019) to identify more precisely the sources of the rise in wage inequality in Denmark. Although the rise in wage inequality is partly a between‐establishment phenomenon, I show that the strengthening of assortative matching patterns and the rising heterogeneity of workers within establishments are the main drivers of growing inequality.

Dispersion in Dispersion: Measuring Establishment‐Level Differences in Productivity

AbstractWe describe new experimental productivity dispersion statistics, Dispersion Statistics on Productivity (DiSP), jointly produced by the Bureau of Labor Statistics (BLS) and the Census Bureau, that complement the official BLS industry‐level productivity statistics. The BLS has a long history of producing industry‐level productivity statistics, which represent the average establishment‐level productivity within industries when appropriately weighted. These statistics cannot, however, tell us about the variation in productivity levels across establishments within those industries. Dispersion in productivity across businesses can provide information about the nature of competition and frictions within sectors and the sources of rising wage inequality across businesses. DiSP data show enormous differences in productivity across establishments within industries in the manufacturing sector. We find substantial variation in dispersion across industries, increasing dispersion from 1997 to 2016, and countercyclical total factor productivity dispersion. We hope DiSP will enable further research into understanding productivity differences across industries and establishments and over time.

Global and institutional drivers of wage inequality between and within firms

Abstract Rising wage inequality in wealthy countries is disproportionately driven by widening differences in pay between workplaces, through increasingly homogenous workforces as well as widening differences in the pay of similar workers. While this is found consistently across countries, the variation in trends highlights the need to study institutional settings. This paper uses cross-national representative European data from the Structure of Earnings Survey to study the trends in wage inequality over time between and within firms, linking these to changes in structural and institutional factors. Indeed, common structural changes such as globalization and digitalization contribute to rising wage inequality across otherwise similar workers within and between establishments. However, the institutional context plays an important role: where employers’ pay setting is constrained through more biting minimum wages or multi-employer collective bargaining, this inequality is compressed and does not grow as much.

Trade, Labor Reallocation Across Firms and Wage Inequality

This paper develops a framework for studying the effects of higher trade openness on the wage distribution that emphasizes within-industry labor reallocation across firms, strong skill-productivity complementarities in production and heterogenous fixed export costs across firms. Assuming no entry in the industry, an autarkic economy that opens to trade experiences a pervasive rise in wage inequality; a trade liberalization in a trading economy increases inequality at the lower end of the distribution, but may reduce it elsewhere. Assuming free entry, opening to trade could result in pervasively higher inequality or wage polarization. The analysis highlights the importance of new exporters (extensive margin) in shaping the aggregate relative demand for skills, a channel controlled by the distribution of fixed export costs in the model.

From Economic Integration to Near Elimination: The Economic Consequences of Isolation

This paper captures the labor market consequences of the Gaza Blockade (2007–), a politically motivated and unanticipated event that provides a rare opportunity for a natural experiment. I am aided by the fact that the West Bank is a natural comparison group for examining the Gaza Blockade. Using a difference-in-difference framework, I find that, relative to domestic workers in the West Bank, those in Gaza experienced an additional 11% point increase in the unemployment rate and an additional 13–20% reduction in real wages. The long-term effect (3 years later), on real wages was at least 1.5 times larger. Rising wage inequality was another consequence of the Blockade, which manifested itself in an upsurge in industry wage differentials and to a lesser extent, the skill premium. This paper also discusses the impact of the crisis on the sectoral composition of the Gazan economy, particularly as a result of the severe contraction of non-service industries in the private sector. While the Gaza Blockade constitutes an extreme case of a massive economic shock and a radical departure from the close economic integration experienced in earlier decades, the results of this study can nevertheless serve to shed light on how other open economies are likely to respond to the increasingly common imposition of restrictions on trade and factor mobility such as economic sanctions, visa restrictions, and trade wars. The effects of such barriers to trade and labor mobility are particularly dire in the absence of labor reforms designed to mitigate their adverse effects. KEYWORDS : Middle East; conflict; economic development; labour; wages; trade

Changing selection into full-time work and its effect on wage inequality in Germany

To explore whether changes in the selection into full-time work among German men were a driver in the rise in wage inequality since the mid-1990s, we propose a modification of selection-corrected quantile regressions. Addressing Huber and Melly’s (J Appl Econom 30(7):1144–1168, 2015) concerns, this modification allows us to estimate the effects of selection with respect to both observables and unobservables. Our findings show that those employed in 1995 would have had lower wages in 2010 than those employed in 2010 and wage dispersion would have been higher, suggesting that full-time workers have become less heterogeneous over time.

Consolidated Advantage: New Organizational Dynamics of Wage Inequality

The two main axes of inequality in the U.S. labor market—occupation and workplace—have increasingly consolidated. In 1999, the largest share of employment at high-paying workplaces was blue-collar production workers, but by 2017 it was managers and professionals. As such, workers benefiting from a high-paying workplace are increasingly those who already benefit from membership in a high-paying occupation. Drawing on occupation-by-workplace data, we show that up to two-thirds of the rise in wage inequality since 1999 can be accounted for not by occupation or workplace inequality alone, but by this increased consolidation. Consolidation is not primarily due to outsourcing or to occupations shifting across a fixed set of workplaces. Instead, consolidation has resulted from new bases of workplace pay premiums. Workplace premiums associated with teams of professionals have increased, while premiums for previously high-paid blue-collar workers have been cut. Yet the largest source of consolidation is bifurcation in the social sector, whereby some previously low-paying but high-professional share workplaces, like hospitals and schools, have deskilled their jobs, while others have raised pay. Broadly, the results demonstrate an understudied way that organizations affect wage inequality: not by directly increasing variability in workplace or occupation premiums, but by consolidating these two sources of inequality.

Wage Inequality: Its Impact on Customer Satisfaction and Firm Performance

This article adopts a marketing perspective to examine how wage inequality between top managers and their employees may have customer-related consequences (i.e., customer-directed effort, customer-directed opportunism, and customer-oriented culture) that affect customer satisfaction and firm performance. Surprisingly, marketing scholars and practitioners have largely neglected this pressing societal issue. The authors collect a cross-industry, multisource data set, including responses by top-level managers and objective data on wage inequality and firm performance from 106 business-to-business-focused firms (Study 1). In addition, they analyze multisource longitudinal panel data covering 521 firm-year observations for business-to-consumer-focused firms (Study 2). The results consistently reveal that wage inequality harms customer satisfaction. This relationship is mediated by customer-directed opportunism and customer-oriented culture but not customer-directed effort. Moreover, while wage inequality has a positive direct effect on short-term firm profitability, this effect is dampened by the negative indirect effect through customer-related consequences and customer satisfaction. Importantly, the positive direct effect of wage inequality on short-term profitability vanishes in the long run, whereas the adverse effect through customer satisfaction persists, leading to a nonsignificant total effect on long-term profitability. These findings may guide researchers, managers, shareholders, and policy makers in addressing the challenge of rising wage inequality.

Evolution of the East German Wage Structure

We analyze the evolution of the wage structure in East Germany over the past two decades and compare it to West Germany. Both regions experienced a rise in wage inequality between 1995and 2009 with wage dispersion in East Germany exceeding West Germany, esp. at the top. We also show that wage inequality is no longer rising in Germany and has even been declining in East Germany after 2009. Compositional changes of the workforce and selection along the employment margin play only a minor role as does the decline of union coverage for the rise in wage inequality. The adoption of minimum wages in selected industries, in contrast, explains all of the turnaround in East German wage inequality after 2009. Demand side changes seem to account for the rise in wage dispersion at the top.

Global value chains, firms, and wage inequality: Evidence from China

How does participating or moving to more upstream in the global value chains (GVCs) affect the premium paid to skilled compared to unskilled labor within firms? In this paper, we develop a model of heterogeneous firms with intermediate trade and two skill inputs, in which we apply the fair wage hypothesis to predict the wage premium changes according to firms' GVCs activities. The model predicts that firms' backward GVC participation, as measured by the share of foreign value-added content in exports (FVAR), has an ambiguous impact on wage inequality of skills, which depends on the relative importance of “FVAR-labor substitution effect” and “FVAR-profit effect.” However, moving to upstream sectors in GVCs, as measured by the export varieties' upstreamness (or average distance from final use), raises a firm's wage premium. Using detailed Chinese firm-level data from 2000 to 2006, we develop a Mincer-type empirical model to study the wage premium changes associated with FVAR and upstreamness. We find robust empirical evidence that the rise of wage inequality in China mainly arises from moving to more upstream sectors rather than changing GVC participation.

Firm Differences: Skill Sorting and Software

Recent research shows that much recent rise in wage inequality comes from growing differences between firms, especially sorting of skilled workers to high-paying firms. This paper explores the role of proprietary software in these changes. Using job ad data, we find that proprietary software is strongly associated with firm wage fixed effects and also with firm skills. Software accounts for half or more of skill sorting across firms. Moreover, both skill sorting and firm wage effects are greater for larger firms. The huge growth in proprietary software helps explain the growth in skill sorting that increases wage inequality.

Income and Wealth Inequality in Hong Kong, 1981-2020: The Rise of Pluto-Communism?

This paper combines national accounts, household surveys, fiscal data, wealth rankings and election polls, in order to provide a comprehensive analysis of the evolution of income and wealth inequality in Hong Kong, as well as its impact on political cleavages over the 1981-2020 period. We find a very large rise in wage inequality since 1981, especially since the Handover of Hong Kong to China. Top 1% earners now receive a much larger fraction of the total wage bill than bottom 50% earners, while the opposite was true in pre-Handover Hong Kong. We also observe an enormous increase in the capital share and the top wealth share (normalized by national income) since 2000. Today Hong Kong’s very top wealth share (top 0.001%) is ranked at very top in the world. Finally, we find that the top income earners and high-income professions (such as executives and managers) are more likely to vote for pro-Beijing camp, while the bottom 85% income group, students and lower-income professionals are more likely to be pro-democratic.

Dispersion in Dispersion: Measuring Establishment-Level Differences in Productivity

We describe new experimental productivity statistics, Dispersion Statistics on Productivity (DiSP), jointly developed and published by the Bureau of Labor Statistics (BLS) and the Census Bureau. Productivity measures are critical for understanding economic performance. Official BLS productivity statistics, which are available for major sectors and detailed industries, provide information on the sources of aggregate productivity growth. A large body of research shows that within-industry variation in productivity provides important insights into productivity dynamics. This research reveals large and persistent productivity differences across businesses even within narrowly defined industries. These differences vary across industries and over time and are related to productivity-enhancing reallocation. Dispersion in productivity across businesses can provide information about the nature of competition and frictions within sectors, and about the sources of rising wage inequality across businesses. Because there were no official statistics providing this level of detail, BLS and the Census Bureau partnered to create measures of within-industry productivity dispersion. These measures complement official BLS aggregate and industry-level productivity growth statistics and thereby improve our understanding of the rich productivity dynamics in the U.S. economy. The underlying microdata for these measures are available for use by qualified researchers on approved projects in the Federal Statistical Research Data Center (FSRDC) network. These new statistics confirm the presence of large productivity differences and we hope that these new data products will encourage further research into understanding these differences.

Decomposing the large firm wage premium in Germany

We use an extensive, matched employer–employee dataset to analyze the employer-size wage relation and its contribution to wage inequality in Germany. Applying models with additive fixed effects for workers and establishments, we document that the large firm wage premium (LFWP), which rose over 25 years, has only recently started to decrease. Our decomposition shows that firm size explains a significant share of the trends in wage inequality. The LFWP accounts for about 20% of the rise in wage inequality from the mid 80s to 2010. From 2010 onward, wage inequality has slightly declined and the LFWP accounts for 33% of this trend reversal.