1. Hipólito Simón Universidad de Alicante
International Differences in Wage Inequality: A New Glance with European Matched Employer-Employee Data (forthcoming in British Journal of Industrial Relations)
This research...
Hipólito Simón
Universidad de Alicante

2. Outline
Motivation:
Examine the origin of international differences in wage inequality in nine European economies using unique international matched employer-employee data
Data:
European Structure of Earnings Survey 2002
Methodology:
Fields (2003) and Yun (2006) econometric decompositions
Empirical results
Conclusions

3. Motivation Previous evidence on the origin of international
differences in wage inequality
Wage inequality exhibits a large international heterogeneity (e.g. Eurostat, 2005, Employment in Europe 2005 and OECD, 2007, Employment Outlook, 2007)
Blau and Kahn (1996, Journal of Political Economy and 2005, The Review of Economics and Statistics) attempt to explain international differences in wage inequality focusing on comparisons of the United States and other developed countries. Their evidence reveals that:
a) Differences in population heterogeneity explain only a minor part of international differences in wage inequality: the bulk of cross-country differences in earnings inequality is explained by differences in labor market prices and, very specially, by residual inequality
b) Higher levels of wage inequality in the United States primarily reflect substantially more dispersion at the bottom of the wage distribution, which is consistent with an institutional explanation
1. i.e. that institutions such as collective bargaining and minima wage regulations compress wage inequality at the bottom of the distribution in countries with centralized wage-setting systems

4. Motivation Previous evidence on the origin of international
differences in wage inequality
Blau and Kahn (1996, 2005) base their empirical analyses on individual microdata with a rather scarce information on wage-determining characteristics of workplaces and jobs
Yet, due to the availability of matched data there exists overwhelming evidence for numerous countries that workplaces are important determinants of wages: wage differentials between employers may play a part in the explanation of international differences in wage inequality
There exists overwhelming evidence for numerous countries that different firms pay observationally similar workers different wages. Previous studies suggest that inter-firm wage differentials hold a strong influence in the levels and changes over time of wage inequality: the magnitude of wage differences between employers may play a part in the explanation of international differences in wage inequality
There is empirical plausibility to the argument that...
Heretofore, an untested question, which is plausibly explained by the fact that international databases with matched data are extremely scarce...

5. Motivation This study: international comparison with
cross-country matched employer-employee data
This research extends previous studies to re-examine the origin of international differences in wage inequality in nine European countries (Italy, Portugal, Spain, the Netherlands, Norway, the Czech Republic, Slovakia, Latvia and Lithuania)
The research draws on the unique international harmonized matched employer-employee microdata of the European Structure of Earnings Survey 2002 (ESES)
Access to ESES microdata has been possible in the context of the project European Labour Market Analysis using Firm-level Panel Data and Linked Employer-Employee Data financed by the European Union (VI Framework Programme). In order to fulfill data protection and confidentiality restrictions the research has been conducted through online remote access (LISSY system) to the microdata
ESED data allow to take a full account of the effect of workforce, job and workplace related factors in cross-country differences in wage inequality

6. 2002 European Structure of Earnings Survey
Data
2002 European Structure of Earnings Survey
ESES is a collection of national surveys conducted in European Union members according to the same methodology and consists of cross-section linked employer-employee data: it constitutes a unique international harmonized linked employer-employee dataset
ESES shortcomings: samples are restricted to employees (i.e. selectivity bias can not be taken into account); the survey covers workplaces with more than 9 employees and industry coverage is not complete
The earnings measure is the gross hourly wage and comprises all payments different from overtime pay (including irregular bonuses)

7. Descriptive evidence
The

8. Unobserved

9. Unobserved

10. Methodology
Decomposing within-country levels of wage inequality: the Fields (2003) technique
The Fields (2003, Research in Labour Economics) regression-based technique provides an exact decomposition of a country’s overall level of wage inequality based on the contribution of each explanatory variable in an individual wage equation (‘relative factor inequality weight’)
It is valid only for the variance of log-wages (yet, following Shorrocks (1982), under a set of axioms it is valid for a wider set of inequality measures)
In all

11. Empirical results
Differences

12. Empirical results
Differences

13. Empirical results
Differences

14. Methodology Decomposing international differences in wage inequality:
the Fields (2003) technique
An extension of the methodology of Fields (2003) provides an exact decomposition of differences in wage inequality between two countries based on the gross contribution of each explanatory variable in an individual wage equation estimated separately for each country (it has been applied to the variance of log-wages)
In all

15. Decomposing international differences in wage inequality:
Methodology
Decomposing international differences in wage inequality:
the Yun (2006) technique
The Yun (2006, Review of Income and Wealth) technique is a synthesis of the methodologies of Fields (2003) and Juhn-Murphy-Pierce (1993, Journal of Political Economy) and provides an exact decomposition of differences in wage inequality between two countries based on the contribution of each explanatory variable in an individual wage equation estimated separately for each country (it is valid only for the variance of log-wages)
It allows to release the gross contribution of each individual factor to international differences in wage inequality in two parts, explained in terms of the differences between countries in prices and endowments
In all

16. Empirical results
Comparisons

17. Empirical results
Comparisons

18. Conclusions
European countries exhibit considerably different wage structures: they differ significantly in the extent of wage inequality and in the relative influence of factors shaping wage inequality
The use in the empirical analysis of the unique harmonized international matched employer-employee microdata drawn from the 2002 European Structure of Earnings Survey allows to identify the part played in shaping international differences in wage inequality of a more complete set of factors than previous studies
Workplaces are important in shaping international differences in wage inequality across European countries:
a) The dispersion of inter-firm wage differentials exhibits a significant international heterogeneity and is highly correlated with wage inequality
b) International heterogeneity in workplace factors is a more influential origin of international differences in wage inequality than workforce heterogeneity
1. Also