The contribution of changes in employment composition and relative returns to the evolution of wage inequality: the case of Spain

Abstract

Wage inequality in Spain decreased slightly between 1995 and 2006 despite significant changes in employment composition. Changes in the composition of the workforce would have increased inequality keeping constant wage structure, but changes in wage differentials are the most important factor determining the evolution of inequality. By subperiods, the low end of the wage distribution compressed between 1995 and 2002, while it experienced a slight increase in inequality afterward, as it was observed in the USA. On the other hand, in contrast to the American case, the high end of the wage distribution was strikingly compressed in the second period.

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Notes

  1. 1.

    In order to reconcile those findings with the hypothesis of polarization, the authors suggest that this recent counterintuitive increase in inequality at the low end of the distribution is attributable to certain institutional changes that occurred in Germany one decade later than in the United States (among them a considerable decrease in union power).

  2. 2.

    This is clearly shown in Fig. 3 (Autor et al. 2008) but not commented on in the text.

  3. 3.

    As will be clear, the data set does not include CEOs. However, Pijoan and Sánchez-Marcos (2010) find similar evidence using the European Household Panel that has no limitation in this regard.

  4. 4.

    Moreover, this survey only includes workers who were on the payroll of a firm on 31st October of the corresponding year.

  5. 5.

    Kernels for the cross-sections with and without the limitations are available upon request.

  6. 6.

    The initial sample in the EUHP for 1994 was 17,000 individuals. Since we only have information on annual earnings and do not have data on how many weeks the individual has actually worked in the past year, we must restrict the sample to employees who have been working for at least 1 year in the firm in question. With all these restrictions, we are left with 3,000 observations per year.

  7. 7.

    We must assume that October is a regular month in order to perform the extrapolation correctly.

  8. 8.

    At least one third of workers did not work the whole year. There are various reasons for this: they may have been hired or fired in the course of the year, injured, or on maternity leave.

  9. 9.

    A priori, it is not evident that overall inequality should evolve similarly to that of men or women, even if inequality evolved similarly for both. This is because men and women have different wage levels and face different degrees of heterogeneity, so a change in the proportion of women in employment should affect inequality per se. In Izquierdo and Lacuesta (2005), some additional exercises are presented that demonstrate that the mechanical addition of women in all sociodemographic groups does not affect overall inequality because the increase in the “between” component is compensated for by a decrease in the “within” component.

  10. 10.

    Indeed, in a different study, Lacuesta et al. (2011) show that the gender gap declines over time once there is a control for a Heckman selection model that considers participation.

  11. 11.

    The difference is statistically significant at the level of 1% for all characteristics.

  12. 12.

    In order to decompose the variance, the regression uses a quartic on age, four levels of education, four levels of seniority and interactions of the quartic on age, and the other two variables. When the regression pools men and women, the gender dummy is interacted with all the other variables.

  13. 13.

    It should be noted that the variance in the residual also declined.

  14. 14.

    Fixed-term contracts were established in 1984. In comparison with permanent contracts, the costs associated with terminating such contracts were very low. The proportion of fixed-term contracts very quickly rose to 30% and has been relatively constant ever since.

  15. 15.

    It should be noted that low values for seniority do not necessarily mean that the person has entered employment very recently since it could be the case that the person changed job voluntarily. Indeed, the labor market reform in 1994 introduced some contract types with lower termination costs that should increase job mobility.

  16. 16.

    The kernel is a Gaussian kernel. We tried first with an optimal bandwidth in accordance with Silverman’s rule, but the kernel was too smooth. We therefore tried with others and finally decided on a bandwidth of 0.07, the same as Hanson and Chiquiar (2005).

  17. 17.

    Regarding overall inequality, the increase in the participation of women does not appear to have much of an effect. Indeed, the change in the proportion of women workers increases the between-group component and reduces the within group one.

  18. 18.

    Although workers with little seniority are more homogeneous, they earn a low wage compared with the unconditional mean, and this increases inequality mechanically.

  19. 19.

    Results are available upon request.

  20. 20.

    To see different solving strategies, see Manski (1988) and Chamberlain (1994).

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Acknowledgements

The authors would like to thank J. F. Jimeno, P. L’Hotellerie, E. Ortega, two anonymous referees, and the participants at the seminar at the Banco de España, the European Central Bank’s Centre for Economic Policy Research, the Fundación de Estudios de economía aplicada, the research department of Banco Bilbao Vizcaya Argentaria, the XXIXth Symposium of Economic Research in Oviedo, Workshop on Spanish Inequality in Carmona, and the University of Barcelona. The opinions and analyses in this article are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.

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Correspondence to Aitor Lacuesta.

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Responsible editor: James Albrecht

Appendix: Robustness of data set limitations

Appendix: Robustness of data set limitations

Table 13 Small firms
Table 14 Sector coverage

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Lacuesta, A., Izquierdo, M. The contribution of changes in employment composition and relative returns to the evolution of wage inequality: the case of Spain. J Popul Econ 25, 511–543 (2012). https://doi.org/10.1007/s00148-011-0371-y

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Keywords

  • Inequality
  • Wage distribution
  • Labor force composition

JEL Classification

  • J30
  • J00