Wage Ratio Research Articles

Avoiding Conscription to the Inter-war 'Army' of the Unemployed: Short-Time Working in the Iron and Steel Industry

This article is a new investigation into the controversial thesis, advanced by Benjamin and Kochin, that the high and persistent levels of unemployment in Britain between 1919 and 1939 were the result of a generous and liberally administered unemployment benefits scheme. By using a case study of the inter-war iron and steel industry, we demonstrate that high benefit–wage ratios applied only to a small proportion of workers in this industry. We argue that the benefit–wage ratio was but a part of a complex web of factors determining the extent to which workers voluntarily chose not to be fully employed. Much more importance, we argue, needs to be attached to the effects of an ageing workforce and the desire to secure employment for offspring. Viewed from this perspective patterns of short-time working at the industry level depended more on collective, rather than individual, rationality.

The impact of income taxation on the ratio between reservation and market wages and the incentives for labour supply

This article extends previous research about the determinants of reservation wages by analysing the effect of progressive income taxation on the ratio between reservation and net market wages. Based on micro data for Germany Socio-Economic-Panel (SOEP) we show that joint income taxation in Germany which discriminates by marital status, has a strong and highly significant impact on the reservation/market wage ratio. Relative to single filers, this leads to strong negative labour supply incentives for secondary earners and to positive incentives for first earners in married couples.

HECKSHER‐OHLIN IN CANADA: NEW ESTIMATES OF REGIONAL WAGES AND LAND PRICES

Many immigrant‐receiving and land‐abundant countries experienced a diminishing ratio of wages to land prices during the globalisation era from 1870 to 1910. Factor price evidence suggests that Canada does not fit the pattern. We present the first Canadian estimates of region‐specific wages and land prices that span the period from 1871 to 1925. Our evidence indicates that while Canada as a nation looks like an anomaly in the era of convergence, this is largely an artefact of aggregating the experience of the labour‐abundant eastern provinces with the late‐settling and land‐abundant western provinces.

Selected Issues in the Rise of Income Inequality

Selected Issues in the Rise of Income Inequality Robert J. Gordon and Ian Dew-Becker Increased American income inequality, in particular the increased skewness at the very top of the income distribution, has received enormous attention. This paper surveys three aspects of rising inequality that are usually discussed separately: inequality within the bottom 90 percent, inequality within the top 10 percent, and international differences in inequality, particularly among top earners. We begin by examining data from the Current Population Survey (CPS) on income ratios between the 90th, 50th, and 10th percentiles, both for men and women separately and for the two sexes combined. We then examine several proposed explanations of changes in relative incomes within the bottom 90 percent, including the impacts of unions, free trade, immigration, the real minimum wage, and top-bracket tax rates. We also assess the hypothesis that the primary driver of increased inequality is skill-biased technological change. We then tackle the most controversial issue, namely, why American incomes at the very top have increased so much, both relative to incomes below the 90th percentile in this country and relative to top incomes in Europe and Japan.1 We distinguish three types of top-level income earners: [End Page 169] "pure superstars" in sports and entertainment, a second group of professionals whose compensation also appears market driven but not amplified by access to a mass audience, and corporate executives, whose incomes are arguably not market driven but who instead can manipulate their pay to their own advantage. Our examination of cross-country differences finds that inequality at the top has increased more in the United States and the United Kingdom than in continental Europe, for what seems to be a combination of reasons. Facts about the Bottom 90 Percent Our 2005 Brookings Paper reported that during 1966-2001 only the top 10 percent of the income distribution enjoyed gains in real wage and salary income equal to or above the economy-wide rate of productivity growth.2 Accordingly, here we analyze the lower 90 percent of the income distribution separately from the top 10 percent. Drawing the line at the 90th percentile is convenient: the widely used CPS data apply best to income groups at and below that threshold, since top-coding limits what the CPS data can tell us about income shifts within the top 10 percent. Much of the literature on changes below the 90th percentile emphasizes their exact timing. The top panel of figure 1, which depicts average hourly wage trends for men and women combined, shows differences in timing when different points in the distribution are compared: the ratio of wages at the 90th percentile to that at the 50th (the 90-50 ratio) increases more or less steadily after 1979, whereas the 50-10 ratio shows a sharp increase during 1980-86 followed by a slow and partial reversal. The 90-10 ratio, which combines these trends, shows a distinct increase between 1980 and 1988 followed by a plateau at a level between 20 and 25 percent above that of 1979.3 However, the depiction of trends for both sexes combined blurs some sharp differences in the patterns for men and women taken separately. For men (middle panel of figure 1), the 50-10 ratio has returned by 1998 to its 1979 level, after a temporary jump in 1979-86. Meanwhile the 90-50 ratio increases at almost a constant rate, rising 14 percentage points between 1979 and 1990 and another 11 percentage points between 1990 and 2005. The data for women (bottom panel) are more surprising. Their 90-50 ratio follows the [End Page 170] Click for larger view View full resolution Figure 1. Changes in Ratios of Average Hourly Wages at Various Percentiles of the Distribution, 1973-2005a [End Page 171] same path as that for men, but their 50-10 ratio increases much more, and the increase is sustained. This is consistent with the fact that women are roughly twice as likely to be paid the minimum wage as men.4 Perhaps most surprising is that the overall increase in the 90-10 ratio for women is almost double the increase for men: 44 log percentage...

Minimum wages and poverty with income-sharing

Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes three contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.

Primary Education as a Fundamental Right: Cost Implications

In an attempt to attain the goal of universal primary education, many developing country governments, including India, have abolished official fees in primary education. The 86th amendment to the Indian Constitution made free and compulsory education a fundamental right for all children in the age group 6-14 years. There are other direct and indirect costs that can deter children from going to school. In this paper, using a rich nationwide data set, the authors construct the incompressible direct costs of attending primary school in India. After controlling for the opportunity cost of going to school (as proxied by the ratio of children's wages to adult's wages), it is found that the direct costs of education adversely affect the probability of children going to school, more so for children from poorer households. The results show that relative to boys, girls are more likely to be affected by the direct costs of schooling. The authors show that making primary education completely free will not increase the attendance rates to 100 per cent. They find that the government will have to incur an additional minimum expenditure of over Rs 2,900 crore every year in order to defray the basic or incompressible cost of attending school.

Union Wages and Union Decline: Evidence from the Construction Industry

Two well-documented empirical findings are that unionized employees typically receive substantially higher compensation than their non-union counterparts and that union representation in the United States has declined over time. Some observers have hypothesized a causal link between these two phenomena: the achievement of a union wage premium, they argue, hastened union decline both by reducing union firms' economic competitiveness and by inducing employers to adopt various union avoidance strategies. Using data from the Current Population Survey and the Census Bureau's Census of Construction, the authors test this hypothesis for the construction industry. Even in estimations that allow for a lagged response and incorporate a variety of controls, they find no evidence that high union/nonunion wage ratios in construction in the 1970s or 1980s resulted in lower union membership in 2000.

Technical Appendix for 'Frictional Wage Dispersion in Search Models: A Quantitative Assessment'

In this Technical Appendix to Hornstein, Krusell, and Violante (2006) (HKV, 2006, hereafter) we provide a detailed characterization of the search model with (1) wage shocks during employment and (2) on-the-job search outlined in Sections 6 and 7 of that paper, and we derive all of the results that are only stated in HKV (2006). In particular, we derive the expressions for our preferred measure of frictional wage inequality: the ratio of average wages to the reservation wage, or, the ‘mean-min’ wage ratio.

Changes in women's hours of market work: The role of returns to experience

Over the past several decades, married women's hours of market work increased significantly in the US. I argue that changes in behavior by married women with children account for much of this change. In particular, the pattern of married women's work hours has changed substantially over the life cycle. In the past, married women in childbearing age tended to specialize in childrearing and home production activities at the expense of engaging in market work. Now they do not curb the hours they work in the market. What factors contribute to this change in behavior? In this paper, I focus on relative changes in returns to experience as an explanation. I use PSID data for the 1970s and the 1990s to estimate the extent to which relative returns to experience have changed. I then use a life-cycle model with human capital accumulation and home production to quantitatively assess the consequences of this increase for married women's hours of work over the life cycle. The estimates of the human capital production function show that women's marginal returns to experience increased by 25% across decades, whereas men's increased by only 6%. I show that this relative change accounts for 96% of the observed variation in married women's hours of work. Moreover, according to the model, the increase in returns to experience accounts for roughly half of the increase in the female/male wage ratio that is found in the data. I also show that a decline in the gender wage gap, holding returns to experience constant, accounts for only 18% of the total increase in hours of work. As a consequence, it cannot explain the change in the shape of women's life-cycle profiles. Although the focus of the analysis is the labor supply behavior of women, the model also allows predictions about the behavior of men and single women. These predictions are consistent with the data.

Women doing men’s work and women doing women’s work: Female work and pay in British wartime engineering

Extreme demand pressures coupled with acute skill shortages in the run up to World War II caused British engineering companies to break down existing production processes into smaller constituent parts. This allowed the employment of persons trained over narrower ranges of skills and helped to create an exponential growth of female jobs, from 10.5% of total engineering employment in 1939 to 35.2% by 1943. Women were officially classified into those doing men’s work and those doing women’s work. Using a unique data set provided by the Engineering Employers Federation, this paper examines female work and pay from 1935 (the first year of rearmament) to 1942 (the peak of production activity) in more detail than has been previously undertaken. It features the pay and hours of piece- and time-rated women, female–male wage ratios, and an assessment of the war’s longer term impact on the female labor market.

Openness and wage inequality in Kenya, 1964–2000

Summary This paper analyzes the evolution of wage inequality in Kenya during 1964–2000. Our measure of wage inequality is the ratio of wages in manufacturing to wages in agriculture, which can be seen as an indicator of sectoral wage inequality or as a proxy for skilled to unskilled wages. We find that changes in relative wages have primarily been driven by the degree of openness, while other factors such as the capital–labor ratio, educational attainment, relative labor productivity, and the ratio between agricultural and manufacturing prices had no significant effect. We conclude that international market integration has reduced wage inequality in Kenya.

Productivity Growth, Technological Convergence, R&D, Trade, and Labor Markets: Evidence from the French Manufacturing Sector

Total factor productivity (TFP) of 14 manufacturing sectors in France has kept up with that of the United States during 1980-2002 and remained well above that of the United Kingdom. Estimates using a dynamic panel equilibrium correction model indicate that sectors further behind the technological frontier experience faster productivity growth and that spending on research and development and trade with technologically advanced economies positively influences TFP growth, but not the speed of convergence. Conversely, TFP growth is negatively related to some key labor market variables, namely the replacement ratio and the ratio of the minimum wage to the median wage.

A nonparametric analysis of the black/white wage gap

This article estimates a nonparametric model of earnings to examine the black/white wage gap. This article extends the Oaxaca decomposition and adjusted wage ratios to a nonlinear form, to allow the use of this nonparametric approach. It finds that the results obtained nonparametrically are very similar to those obtained with variants of the (misspecified) Mincer model, suggesting that the parametric models may be appropriate in situations where the nonparametric estimator could not be applied.

A Fallacy of Wage Differentials: Wage Ratio in Distribution

This paper demonstrates a fallacy of the wage differential between educational statuses. A large number of studies have based their approaches upon the wage ratio between educational statuses. However, this wage ratio contains a simple but crucial fallacy. The wage ratio is tricky; it changes even if both the labor market and the school effects remain unchanged. Irrespective of the school effects, the wage ratio first decreases and then increases as the advancement rate increases.

Do Schools Form Human Capital? Distributional Divide and Cohort-Based Analysis in Japan

This paper presents empirical wage analyses in Japan on the basis of the framework of Saito (2005). Data arranged by cohorts enable analyses on the effect of the educational advancement rate with regard to the wage ratio. Empirical results in Japan suggest that a statistical trick causes most of the wage ratio changes. Further, the real effects of higher education on wages range from slightly negative to insignificant.

Women Doing Men's Work and Women Doing Women's Work: Female Work and Pay in British Wartime Engineering

Extreme demand pressures coupled with acute skill shortages in the run up to World War II caused British engineering companies to break down existing production processes into smaller constituent parts. This allowed the employment of persons trained over narrower ranges of skills and helped to create an exponential growth of female jobs, from 10.5% of total engineering employment in 1939 to 35.2% by 1943. Women were officially classified into those doing men's work and those doing women's work. Using a unique data set provided by the Engineering Employers Federation, this paper examines female work and pay from 1935 (the first year of rearmament) to 1942 (the peak of production activity) in more detail than has been previously undertaken. It features the pay and hours of piece- and time-rated women, female-male wage ratios, and an assessment of the war's longer term impact on the female labor market.

The Effect of Changes in Minimum Wage Rates on Provincial Unemployment Rates, 1970-77

This paper estimates the effect of different minimum wage to average wage ratios among provinces on differences in provincial unemployment rates. The effect is found to be statistically significant, but small in magnitude.

Institutions, wages, and inequality: The case of Europe and its periphery (1500–1899)

This paper explores the long-run relationship between institutions and wage outcomes in Europe and its periphery. I find that cities that exercised stronger institutional protection of private property experienced: (i) higher levels of both skilled and unskilled real wages, as well as (ii) lower levels of inequality as measured by the skilled–unskilled wage ratio. While the first result corroborates existing work on the positive growth effects of better institutions, the second finding is more novel to the literature. Some explanations are proposed for how stronger institutions can cause an increase in the relative supply of skilled workers, thus lowering wage inequality.

REFRIGERATION AND DISTRIBUTION: NEW ZEALAND LAND PRICES AND REAL WAGES 1873-1939

The responses in New Zealand to the opportunities of refrigeration transformed farming in the Dominion during the half-century from 1890. Closer settlement and the extension of the cultivated area combined with more intensive farming methods to increase land productivity and real gross domestic product capita to the extent that living standards in New Zealand measured by the Human Development Index ranked first in the world by 1913. In contrast, real wages in the Dominion stagnated. The refrigeration-related trade boom had powerful income distribution effects that increased sharply the land rental–wage ratio during the years to 1920. Widely diffuse land ownership in New Zealand tempered the rise in income inequality, to set the Dominion apart from other land-abundant economies of the periphery.

The Gender Pay Gap by Occupation: A Test of the Crowding Hypothesis

Identified, structural wage equations for seven occupations are estimated to test the crowding hypothesis—that the gender pay gap is due to females being crowded into low‐paying occupations—using data drawn from the 1996 wave of the National Longitudinal Study of Youth (NLSY79). Occupational preferences are used to estimate a logit probability model of occupational assignment to create instruments to control for self‐selection. Wage equations are estimated for all workers and for full‐time, year‐round workers. Identical specifications are estimated for private‐sector workers. The results are not consistent with a crowding explanation as the sole source of the gender pay gap unless crowding occurs at less aggregated levels of occupations than those used for this study. (JEL J16, J31, J71)