Wage Inequality Research Articles

Labour market inequality: a comparative political economy perspective

Abstract Large and rising earnings and employment inequalities in countries such as the USA and the UK pose fundamental questions for social scientists and challenges for policymakers. Mainstream economists have explained these outcomes mainly in terms of competitive market forces, particularly the mismatch between technology-driven demands for skills and those supplied by workers. In contrast, political economy perspectives focus on employer–employee bargaining power, driven by the monopsony power of firms and declining institutional and policy protections for workers. We critically assess the evidence on the education wage premium and employment polarization used to support the competitive market explanation for US wage inequality. We then show that the incidence of decent pay for young less-educated workers varies sharply across similarly rich countries and that new indices of institutional bargaining power closely correspond to differences in pay distributions but are uncorrelated with conventional measures of employment performance. We conclude that well-designed institutional and policy changes can substantially promote shared growth and the well-being of working families.

Market power and labour market inequality

Abstract I discuss how firms contribute to inequality in the UK as laid out in the article in this collection by De Loecker, Obermeier and Van Reenen. As in other economies around the world, the UK has seen a rise in market power since 1980 leading to an increase in inequality of firm sizes. While firm inequality per se is not harmful, when it is driven by market power, it does have major implications for the labour market. This commentary examines the effect of the firm size distribution and market power on the labour share, declining labour dynamism and wage inequality. I also outline policy responses that reduce inequality and increase economy-wide well-being.

Labour market inequality in France and in the UK

Abstract This commentary shows that a high minimum wage, a rigid grid of minimum wages negotiated at central or sectoral level and legislation ensuring job stability for employees on permanent contracts have enabled France to contain wage inequalities. On the other hand, there is a low employment rate and a high unemployment rate that create significant inequalities in access to employment and a high poverty rate before taxes and transfers.

Labour market inequality

Abstract Wage and earnings inequality has been on the rise in the United Kingdom (UK) since the late 1970s/early 1980s, and with faster increases than comparator countries, it is now one of the countries with the highest levels of wage and earnings inequality in the developed world. Labour market inequality arises in various forms: inequalities in employment opportunities, wages, and hours worked, but also in other dimensions of employment, such as job security. This article considers key factors that have shaped labour market inequality in the UK over the last four decades, with a focus on technological changes and skill demand, labour market institutions, and contract regulation.

Firms and inequality

Abstract We review the existing literature on falling business dynamism and present a new analysis using comprehensive UK firm-level panel data. Since the mid-1990s, there has been a large increase in UK firm-level inequality (especially in the upper tails) of productivity, wages, markups and labour shares, similarly to the USA. We suggest a simple theoretical framework for understanding some of these trends and quantitatively analyse why, despite increasing markups, the UK labour share has not fallen as sharply as that in the USA. Finally, we suggest some policy options in response to these worrying trends, including modernizing competition rules to deal with the growth of superstar firms and strengthening worker bargaining power.

Technical change, globalization, and the labour market: British and American experience since 1620

Abstract The history of the last four centuries in the UK and USA divides into four phases. Output per worker grew in all of them. Real wages grew on average from 1620 to 1770 and from 1840 to the 1970s. During the Industrial Revolution (1770–1840) and the post-1970 Service Revolution, however, the average real wage was flat and wage inequality increased. Rising real wages in both countries have led to labour-saving technical change. Technical change, structural shifts, and globalization have also led to stagnant wages and increased inequality. British performance has been particularly poor since 1900 and, especially since 1970, as the country has fallen from a high position to the bottom of the west European standings in labour productivity and real wages.

Publication and Attenuation Biases in Measuring Skill Substitution

Abstract A key parameter in the analysis of wage inequality is the elasticity of substitution between skilled and unskilled labor. We show that the empirical literature is consistent with both publication and attenuation bias in the estimated inverse elasticities. Publication bias, which exaggerates the mean reported inverse elasticity, dominates and results in corrected inverse elasticities closer to zero than the typically published estimates. The implied mean elasticity is 4, with a lower bound of 2. Elasticities are smaller for developing countries. To derive these results, we use nonlinear tests for publication bias and model averaging techniques that account for model uncertainty.

Corporate structure, partial privatization, and wage inequality: Evidence from China's split share structure reform

This paper examines the effects of privatizing China's state-owned enterprises (SOEs) on wage distribution and the welfare of the economy. Privatizing profitable SOEs can narrow wage inequality and improve welfare, and it is however accompanied by a business dynamism effect that can widen the skilled-unskilled wage gap. Using China's split share structure reform in 2005 as a quasi-natural experiment, we empirically demonstrate for profitable SOEs a positive relationship between partial privatization and wage gap. Our findings are consistent with the plan to wind down unprofitable SOEs that would not survive without government subsidies.

Offshoring, firm-level adjustment and labor market outcomes

This paper studies how the China shock affects unemployment rates and wage inequality across high-skilled and low-skilled workers in the United States, with particular emphasis on the dynamic and general equilibrium channels of firms' production locations and entry decisions. To shed light on the subject, I build a two-country trade-in-task model with firm heterogeneity, search-and-matching labor market frictions, and firms' endogenous selections into entry and offshoring. The model, consistent with evidence from vector autoregression analyses, uncovers important dynamics with implications for the impact of the China shock on U.S. worker inequality. Namely, it shows association between a decrease in offshoring costs and a short-lived increase in low-skilled unemployment in the source country, a longer-term decline in high-skilled unemployment, a transient expansion of the wage gap between high- and low-skilled workers, and an increase in firm entry.

Winner-takes-all or inclusive growth? The impact of digitalization on inter-firm wage inequality: evidence from China

ABSTRACT While previous research explores the impact of digitalization on individual firms’ performance, its potential to generate wage changes among firms with different characteristics, and subsequent inter-firm wage inequality, is often overlooked. Therefore, using China’s city panel data from 2003 to 2019, we assess the impact of digitalization on inter-firm wage inequality. Our findings reveal that digitalization increases inter-firm wage inequality in China, which is further validated using robustness tests. Mechanism tests reveal that digitalization tends to enhance high-wage firms’ productivity, widening the inter-firm productivity gap and exacerbating wage inequality. Further analysis indicates that digitalization boosts productivity more strongly in state-owned firms and those with higher research and development expenditure or more skilled talent, which typically pay higher wages, further widening the wage gap between firms. Our study supports the winner-takes-all perspective in the digital era, suggesting that the government should actively implement measures to protect vulnerable firms and maintain social equity.

Monetary policy rules and the inequality-augmented Phillips curve

Much has been written on the relationship between inflation and unemployment; however, the issue of inequality and the fact that monetary policy has an impact on inequality when attempting to influence these variables is frequently overlooked. By contrast, this paper explores the relationship between inequality, unemployment, and inflation. To do so, we extend the agent-based model of Rolim et al. (2023) and investigate the inflation-unemployment-inequality nexus, which results in the inequality-augmented Phillips curve, linking higher unemployment to lower inflation and higher inequality. We show that the decrease in low-wage workers’ bargaining power may explain the flattening of the Phillips curve and higher income and wage inequalities. In a second experiment, we find that a monetary policy rule prioritizing low inflation rates leads to higher unemployment and inequality. Overall, our results suggest that income inequality should be considered an important monetary policy dimension.

Does environmental pollution reduce residents’ income? Evidence from CFPS in China

Understanding the relationship between environmental pollution and residents’ income is extremely important for promoting sustained progress and high-quality economic growth. This research examines the impact, mechanism, and heterogeneity of environmental contamination on residents’ earnings by fusing the micro data from China Family Panel Survey with the macro data of government statistics. The results reveal that environmental degradation has a significantly negative impact on residents’ individual income. Further research on the intermediary mechanism finds that environmental pollution plays a harmful role in residents’ income by reducing residents’ subjective well-being and labor employment. Besides, the income effect of environmental pollution is significantly heterogeneous among different regions and differentiated groups. The deteriorating environmental quality widens urban–rural income gap and increases wage inequality of inhabitants in eastern, central, and western regions of China. The gender income gap and the income disparity between different income brackets also expand with environmental deterioration. These findings not only prove that long-term development at the cost of the ecological environment is undesirable, but also demonstrate the important role of the improvement of ecological environmental quality in promoting human well-being.

Unemployment: a hidden source of wage inequality?

AbstractAlthough unemployment plays a central role in the emergence of labour market disparities, rarely any studies have linked its dynamics with the overall level of wage inequality. This study addresses this gap by assessing how unemployment is associated with both between- and within-group wage disparities. Hypotheses derived from labour market theories are tested using comprehensive longitudinal data from the Dutch OSA Labour Supply Panel spanning 1985–2008. Results from newly developed variance function panel regression models demonstrate that wages of previously unemployed workers are both lower and more dispersed compared to the wages of continuously employed workers. We also found that wage disparities were more pronounced among previously unemployed men than women. The results also demonstrate the usefulness of the variance function panel regression as a method for analyzing sources that drive wage inequality within persons and over time.

Earnings and Earnings Inequality in South Africa: Evidence from Household Survey and Administrative Tax Microdata from 1993 to 2020

In this paper I use household survey and administrative tax microdata to describe earnings inequality in South Africa over the period 1993–2020. I find that earnings inequality is very high but has been stable, or even declined by some measures, and earnings increases have been largest at the bottom of the earnings distribution. Previous findings of increasing earnings or wage inequality in South Africa from 2010 onwards come from one set of household surveys. I show that the publicly available data from these surveys include poor‐quality earnings imputations and that non‐public data without these imputations provide more sensible trends in earnings and earnings inequality. Comparisons between tax and survey data also show that earnings inequality in the tax data is generally higher than in the more comparable households survey and that earnings in the surveys is under‐captured far down the formal sector earnings distribution.

Centre party, district magnitude, and wage inequality in service economy

This paper aims to elucidate the variations in wage inequality within the service industry across different nations. Scholars have emphasised the pivotal role of policies designed to balance flexibility and job security in the service sector, crucial for fostering its growth while mitigating wage disparities. We argue that the balance between flexibility and security of service sector employment is most likely to emerge under centre party governments in high-magnitude electoral systems. Centre parties, owing to their political detachment from organised labour and industry, encounter fewer obstacles in representing the unorganised interests of service sector workers. Furthermore, high-district magnitude systems incentivise centre parties to build comprehensive coalitions that address the diverse concerns of service sector workers. Our empirical analysis, spanning 14 OECD countries from 1995 to 2007, demonstrates that service sector wage inequality diminishes as district magnitude and the cabinet share of centre parties increase.

New forms of employment: development of take-away delivery and urban–rural wage inequality

PurposeSince smartphones became ubiquitous, online grocery and food purchases through take-away delivery platforms have steadily increased in China. Nevertheless, whether the development of take-away delivery can ameliorate urban–rural wage inequality still requires further analysis. The purpose of this paper is to clarify whether this positive effect exists.Design/methodology/approachThis paper makes estimations based on city and individual levels combining the Chinese Household Income Project (CHIP) 2008, CHIP 2013, CHIP2018 survey data and the take-away delivery site data. At the city level, the Oaxaca-Blinder (O-B) decomposition method is employed to construct wage inequality index of urban and rural labors. At the individual level, this paper analyzes urban–rural wage differentials with high or low formal education level.FindingsThe rapid establishment of take-away delivery sites has resulted in an increase of 52.425 yuan on average in the annual wage of rural labors with low formal education level. When the cumulative number of sites increases by 1 unit, the annual wage inequality index decreases by 0.007 on average. Labors with the characteristics of rural household registration and low education can enjoy more dividends. Through inter-/within-industry decomposition, this paper elaborates formal education, age and cross-industry transfer as the main factors for the improvement of urban–rural wage inequality. Narrowing effect of wage differences between different groups in multiple sample slices also contributes to the mechanism analyses.Originality/valueTo the best of the author’s knowledge, this paper is the first to analyze the impact of take-away delivery development on the urban–rural wage inequality from the perspective of the establishment of take-away delivery sites. This empirical study will enrich the existing theoretical perspectives on urban–rural divide under the emergence of new forms of employment. The results indicate that new forms of employment represented by take-away delivery can not only promote economic growth, but also eliminate urban–rural inequality.

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.

Cross‐ownership, business dynamism, and wage inequality in general equilibrium

AbstractThis study examines the distributive and welfare effects of cross‐ownership by firms in a general equilibrium economy on the product and factor markets. The cross‐ownership of equities, such as collusion, tends to be anticompetitive, thereby narrowing the wage gap between skilled and unskilled labor in the short term with the existing number of firms. In the capital market, reducing capital cost through cross‐ownership causes new firms to enter the market in the long term. This firm‐entry effect induced by cross‐ownership through an increase in the number of competitors generates a competitive force that exacerbates wage inequality and reduces welfare in the economy.

Impact of Gender Empowerment on Gender-based Wage Inequality and Unemployment: A Theoretical Analysis

The article develops a three-sector competitive general equilibrium model with an agricultural sector, a manufacturing sector and a non-traded service sector and three factors: male unskilled labour, female unskilled labour and skilled labour. The article shows how sociocultural barriers impact female labour force participation and male–female wage disparity in the presence of male unemployment in the labour market in a developing economy. The analysis finds a rise in gender wage inequality and a decrease in male unskilled labour unemployment when the female labour force rises due to a fall in sociocultural barriers. Finally, we show that the Gini coefficient of income inequality of unskilled labour and gender-based wage inequality move in opposite directions due to the rise in female labour participation in the workforce and the fall in the male unemployment rate. JEL: D50, J31, J61

Qualitative Study to Explore the Occupational and Reproductive Health Challenges among Women Tobacco Farm Laborers in Mysore District, India.

Tobacco farm laborers are primarily women and children working for very low wages. The aim of this study was to explore occupational and reproductive health challenges faced by women tobacco farm laborers in Mysore District, India. We conducted interviews and six focus group discussions among 41 women tobacco farm laborers. Codes and themes were generated based on deductive and inductive approaches using the socioecological model. Participants reported symptoms of green tobacco sickness including headaches, back pain, gastric problems, weakness, and allergies during menstruation, pre-natal, and post-natal periods. Participants had poor awareness about the health effects of tobacco farming, and there were gender inequalities in wages and the use of personal protective equipment. Participants received support from family and community health workers during their pregnancy and post-natal period. Women reported wanting maternity benefits from the tobacco board, as well as monetary support and nutritional supplements. There is a need for health education about the environmental dangers of tobacco among farm laborers, and more supportive policies for women farmworkers during pregnancy and post-natal periods.