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This chapter tracks changes in wages and wage inequality in Britain since the 1970s, focusing on the principal differences in wage levels between individuals and on what explains the rise in wage inequality. Section 4.2 begins with a discussion of the principal data sources used to track the evolution of wages over time. Section 4.3 gives some facts and figures on the extent of wage inequality across groups and over time, while Section 4.4 outlines and evaluates the main hypotheses put forward to explain rising wage inequality. Section 4.5 offers some concluding observations.

This chapter confronts the third of the four paradoxes. Standard human capital theory predicts that, as the variance (dispersion) in educational attainment declines, so should the inequality of earnings. Yet, while the variance in schooling did, in fact, lessen substantially after the early 1970s, the inequality of earnings jumped dramatically. Moreover, the variance of workplace skills has also declined since 1970. The chapter reconciles trends in wage inequality with those in skill and schooling inequality.

This chapter examines wage inequality in urban China. Increased wage discrimination against women and minorities was observed in favour of Communist Party members. The market forces operating in the growing private sector and the relative immunity of the state sector from those forces increased wage segmentation among types of ownership. Provincial differences in the pace of reform and economic growth created spatial segmentation in wages that could not be removed by the equilibrating movement of labour.

This chapter studies the considerably higher level of wage inequality in the US than in nine other OECD countries. It appears that the greater overall US wage dispersion primarily reflects substantially more compression at the bottom of the wage distribution in the other countries. While differences in the distribution of measured characteristics help to explain some aspects of the international differences, higher U.S. prices (i.e., rewards to skills and rents) are an important factor. Labour market institutions, chiefly the relatively decentralized wage-setting mechanisms in the US, provide the most persuasive explanation for these patterns.

This chapter argues that because of important cross-national differences in domestic political and economic institutions, the severity of Rodrik's globalization dilemma varies across countries. In particular, the degree to which globalization increases demands for protection depends on how, and the extent to which, shocks in international commercial markets are transmitted to domestic labor markets. The chapter is organized as follows. The first section discusses some of the new challenges to corporatism and how corporatist institutions have evolved in response to them. The second section theoretically examines how trade affects labor market volatility in both competitive and corporatist systems—a topic that gets relatively little attention in the literature. It then turns to the empirical relationships between trade, employment, and labor market volatility. The final section reviews the broader literature on the comparative economic performance of national labor markets throughout the OECD, focusing primarily on the issue of wage inequality.

Using microdata for twenty-two countries over the 1985–94 period, this chapter shows that more compressed male wage structures and lower female net supply are both associated with a lower gender pay gap, with an especially large effect for wage structures. Reduced-form specifications indicate that the extent of collective bargaining coverage is also significantly negatively related to the gender pay gap. Together, the wage compression and collective bargaining results suggest that the high wage floors that are associated with highly centralized, unionized wage setting raise women's relative pay, since women are at the bottom of the wage distribution in each country.

Uses data on individual earnings in manufacturing industry for five African countries in the early 1990s to test whether firms located in the capital city pay higher wages than firms located elsewhere, and whether such benefits accrue to all or only certain types of workers. Earnings equations are estimated that take into account worker characteristics (education and tenure) and relevant firm characteristics (notably size and whether foreign owned). Any location effect identified is therefore additional to appropriate control variables.

Using microdata to analyze the gender pay gap in ten industrialized nations, this chapter focuses on the role of wage structure — the prices of labour market skills — in influencing the gender gap. It shows that the wage structure is extremely important in explaining why the US gender gap is higher than that in most other industrialized countries. It concludes that the US gap would be similar to that in Sweden and Australia (the countries with the smallest gaps) if the United States had their levels of wage inequality. This finding reflects the larger penalty in the United States for those with low skill levels or employed in low-wage sectors.

This chapter examines the evolution of skills provided by schooling systems across Europe, with emphasis on primary and secondary schooling. Important questions addressed in this chapter include: what the European countries get for their resource investments, that is, what skills are provided by these schooling systems; how these general skills have evolved over time; and the implication of the evolution of skills for wage inequality. The US is used as a benchmark, and data from a selection of European countries are presented. IT should be noted that the actual selection of European countries is mostly determined by the availability of data. Skills are first analysed in the oldest cohort and then for successively younger cohorts. Basic skills brought to the labour market by successive cohorts born from 1935 until 1970 are explored, along with skills for those still in schools. Finally, the relationship between skills and wage inequality across countries is examined.

The influential work by Goldin and Katz (2007, 2008) argues that rising levels of inequality are caused by skill-biased technological change (SBTC). This chapter, in contrast, claims that the institutional setup of the training system and the centralization of collective wage bargaining are two important factors shaping the impact of SBTC and, therefore, labor market stratification. Using a sample of OECD countries from 1980 until 2000, we find that a strong involvement of firms in vocational training, when accompanied by high levels of bargaining centralization, decreases youth unemployment. Public investments in vocational training are less effective in reducing youth unemployment, but have a diminishing impact when combined with strong bargaining centralization. Furthermore, public investments in training are more strongly associated with decreasing wage dispersion than firm involvement. We find evidence for an inverted U-shaped relationship: when bargaining centralization is at either low or high levels, public investments in VET are most effective in reducing wage inequality. The effect is smaller in magnitude when bargaining is semi-decentralized, because in this case the benefits of public investments drive up the wages of skilled workers relative to those of unskilled workers.

Ireland and New Zealand are often acclaimed as 1990s labor market success stories. Andrew Glyn shows that Ireland achieved this extraordinary improvement in labor market performance without adopting the OECD’s neo-liberal labor market policy prescription. Irish employment took off and unemployment collapsed without an increase in wage inequality at the bottom, without significant changes in employment protection regulations, and without major changes in the unemployment benefit system. He attributes Ireland’s success not to deregulation, but to cooperative and regulated wage bargaining. In contrast, New Zealand’s policy makers were early and enthusiastic converts to the OECD’s labor market deregulation prescription, and the effects, particularly on labor unions, were substantial. But New Zealand’s unemployment performance was quite mediocre in the 1990s, fluctuating between 7.8 and 10.3% between 1990 and 1994, and from 6.3 and 7.5% between 1995 and 1999. The lesson Glyn draws from this Ireland-New Zealand comparison is that “extensive labor market deregulation is neither a necessary nor a sufficient condition for a radical improvement in employment.”

While the Netherlands experienced high unemployment in the late 1980s, it outperformed the United States in the early 1990s and has done so since 1997. Germany’s high unemployment is entirely a post-unification phenomenon; it was not until 1993 that Germany’s unemployment rate was higher than that of the United States. The author argues that despite Dutch reforms, by the late 1990s their regulations still tended to be stronger and social protection spending more generous than Germany’s. Wage and skill dispersion are quite similar, as are the unemployment benefit systems. The answer lies elsewhere. The Netherlands has been distinguished by high levels of part-time employment, particularly among women, and has experienced substantially slower wage growth (partially compensated for by tax cuts), which contributed to an export boom. The key to the Dutch success has been a consistent mix of monetary, fiscal and wage policies. In contrast, in Germany the politics of the unification process helped produce both large public debts and substantial growth in real wages. The response was fiscal austerity, tight monetary policy, and a rise in social security payments levied on both employers and employees. The chapter concludes that the policy debate has greatly overemphasized the role of supply-side work incentives (regulations and benefits) and neglected the role of consistent wage bargaining, tax, and macroeconomic policies.

This concluding chapter makes use of evidence from the earlier chapters in this volume, from other recent country case studies, and from additional data on selected country “success stories” and “failures” to sum up the empirical case against the orthodox view—that labor market rigidities explain high unemployment and that free market reforms are required for good employment performance. Some dimensions of the French, Italian, Belgian, and Austrian experiences not covered in the earlier chapters are briefly discussed. The country case study evidence suggests an alternative to the orthodox rigidity account: employment performance across affluent countries appears to be related to the ability to effectively coordinate macroeconomic and social policies with the wage bargaining system, and that this in turn seems to require both strong employer and union associations and a relatively stable and consensual political environment. In any case, it is evident that fundamentally different labor market models are compatible with low unemployment, ranging from the free market “American Model” to the much more regulated and coordinated Scandinavian systems. The policy discourse should move beyond free market orthodoxy.

From a stunning 23.9% in 1994, Spain’s unemployment rate fell to 13% in 2001. In this chapter, Bustillo challenges the conventional views that the main culprits of Spain’s high unemployment were overly generous and protective labor market institutions, and that the recent dramatic improvement can be explained by free market oriented institutional reforms. Benefit levels were not nearly as generous as many observers believe—about 30% of the average wage, one of the lowest in the European Union. Spain has been characterized by wage moderation, relatively low labor costs, and relatively high earnings inequality. Nor are employment protection laws particularly onerous: by the mid-1980s dismissal rates were comparable to other leading OECD countries. The author contends that the sources of much of the unemployment problem can be found elsewhere: in the rapid transformation from a highly agricultural to a service economy in a period of political upheaval in which employer-union relations were highly charged; a rapidly growing labor force; low R&D investment; an ineffective system of job training and placement; and limited geographic mobility, due largely to high housing prices which made it risky for workers to relocate.

This chapter examines how minimum wage changes affect wages and earnings, first describing how minimum wages affect the wage distribution. The effect of the minimum wage on the distribution of earnings is not as straightforward as its effect on the distribution of wages, and thus the second goal of the chapter is to provide a more complete description of how the minimum wage influences labor income—both for workers directly affected by the minimum wage and for workers who might be indirectly affected via spillover effects. To this end, it presents evidence on how minimum wages affect workers at different points in the wage distribution. This evidence examines a broader set of margins along which workers at different points in the wage distribution may be affected, including wages, employment, hours, and, ultimately, labor income.

This chapter examines the distributional and structural developments of real hourly wages and monthly earnings in Egypt between 1988 and 2006 on the basis of the Egypt Labor Market Panel Survey 2006 (ELMPS 2006), and compares the results to those of the Labor Force Sample Survey 1988 (LFSS 1988) and Egypt Labor Market Survey 1998 (ELMS 1998). In particular, it explores the changes in average hourly wages and monthly earnings across important socio-economic groups (by gender, occupation, industry, level of education, and sector of ownership). The chapter also investigates how the share of earners with low wages changed over time and across socio-economic groups. In general, the results reveal that after the initial period of real-wage erosion and wage compression (1988–98), both real wages and wage inequality started rising again for most groups in Egypt. In addition, after almost twenty years of structural adjustment measures, labor market rewards in Egypt mostly followed a U-turn path of decline followed by recovery and return to pre-adjustment levels.

Evidence shows that wage and earnings inequality has increased sharply in the United Kingdom since the late 1970s. With perhaps the exception of the United States, the magnitude of the increase in wage inequality was unmatched in any other industrialized countries. The changes in the gender wage gap experienced by the United Kingdom and the United States appear to be more dramatic than those found in other countries. One possible explanation for the unique wage inequality experience of the United Kingdom is that since 1979, the institutional structures of the labor market changed dramatically. Union decline, falls in public-sector employment, contracting out, and competitive tendering of some public-sector services resulted in changes in the way pay was formally set. This chapter explores whether these reforms in the institutional structure of the labor market contributed to the increase in wage inequality in the United Kingdom. It also looks at the role of unionization, privatization, and the minimum wage in explaining the key differences between the evolution of wage inequality in the United Kingdom and the United States.

The authors investigate the extent to which the logic of flexibility that underpins the OECD’s Job Study can explain the relative labor-market performance of the United States and the United Kingdom. Greater labor-market flexibility should be associated with relatively lower unemployment and higher employment of less-skilled workers, particularly young workers and those with lower levels of formal education: lower labor costs should “price” these workers back into jobs. Their principal findings call into question this central orthodox thesis. Labor market outcomes of both young and less-skilled workers in the flexible United States and United Kingdom are no better and frequently are far worse than those of their counterparts in most of the rest of the OECD. Regarding the U.K., Schmitt and Wadsworth conclude that “the serious restructuring of the country’s labor market since the early 1980s appears to have produced no noticeable improvement in the labor market prospects facing less-skilled workers in the 1990s relative to the 1980s.” Indeed, they find that all of the improvement in U.K. unemployment rates is accounted for, not by workers being priced into the labor market, but by workers dropping out of the labor market.

This chapter discusses the changes in wage inequality over the last thirty years. It tries to identify in the clearest possible way, using Current Population Survey (CPS) data, what have been the main changes in inequality and the wage structure since the early 1970s. The purpose of this exercise is to establish the basic facts about the variety of measurement problems and identify changes in wage inequality. These measurement problems include topcoding, the growing nonresponse to earnings item in the CPS. The pattern of change in inequality across education groups is highly consistent with the broader changes at the top and low ends of the distribution. The mean wages of college graduates and postgraduates increased steadily relative to high school graduates, though the growth was more marked in the 1980s.