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Research Programmes | Labour:

Labour Market Inequality

Recent work on Labour Market Inequality

Studying trends in inequality and explaining it have been major research themes at the CEP. Steve Machin outlines some of the significant research findings on wage inequality that have emerged from the Centre in his 'Big Ideas' article (2008). CEP work on minimum wages has also been highly influential, and this is covered in Labour Market Institutions and Policies.
  • Trends in inequality

    A startling feature of recent decades has been the rapid rise of inequality in the UK, US and other advanced nations. Trends in inequality are summarised in a CEP Special Report by Stephen Machin and John Van Reenen (2007).

    Further reading and viewing:
    Changes in Wage Inequality

    Inequality in the US is covered by Stephen Machin and John Van Reenen in the context of the 2012 elections.

    Inequality in the UK is covered in a CEP short film (2014), which focuses on the UK over the last 50 years.

    Pay at the top

    Brian Bell and John Van Reenen have been studying the top of the wage distribution in the UK. They document the remarkable rise in the share of aggregate pay going to those at the very top of the distribution over the last decade in the UK and highlight the role of the financial sector. Rising bonuses paid to bankers accounted for around two-thirds of the increase in the national wage bill ('earnings pie') taken by the top one percent of workers since 1999. Surprisingly, even after the crisis bankers took at least as large a share of the earnings pie in 2011 as they did at the peak of the boom in 2007 and saw no worsening in their employment outcomes relative to other similar workers.

    Further reading:
    Bankers and their Bonuses

    Extreme Wage inequality: Pay at the Very Top.

    Productivity and wages

    Giulia Faggio, Kjell Salvanes and John Van Reenen (2010) consider whether the growth in individual inequality of wages is closely linked to firm inequalities of productivity and size. Using longitudinal panel dataset from the UK, covering the manufacturing and non-manufacturing sectors since the early 1980s they find evidence that productivity inequality has increased and that most of the increase in individual wage inequality has occurred because of an increase in inequality between firms (and within industries).. Increased productivity dispersion appears to be linked with new technologies.

    Further reading:
    The Evolution of Inequality in Productivity and Wages: Panel Data Evidence - this was subsequently published in Industrial and Corporate Change, 2010.

  • Job polarisation and technology

    The phenomenon of 'job polarisation' is increasing inequality as the labour market splits into high- and low-wage work. The basic mechanism is that machines and software programs have replaced employees in many routine jobs in the middle of the income distribution. Alan Manning, who coined the term 'job polarisation' over ten years ago to describe this, has built up a body of work on the topic.

    Lousy and lovely jobs

    The initial research by Maarten Goos and Alan Manning (2003) found that the pattern of employment changes in Britain over the period 1975 to 1999 was consistent with job polarisation. They found that technology led to rising relative demand in well-paid skilled jobs (that typically require non-routine cognitive skills) and in low-paid least skilled jobs (that typically require non-routine manual skills) and falling relative demand in the 'middling' jobs that have typically required routine manual and cognitive skills.

    Further reading:
    Lousy and Lovely Jobs: the Rising Polarization of Work in Britain - this was published in The Review of Economics and Statistics, 2007.

    Alan Manning updates the analysis on Britain up to 2010 in a recent CentrePiece article.

    In related work, Guy Michaels, Ashwini Natraj and John Van Reenen (2014) use data from the US, Japan, and nine European countries from 1980 to 2004 to test the hypothesis that information and communication technologies polarise labour markets by increasing demand for the highly educated at the expense of the middle educated, with little effect on low-educated workers. They find that industries with faster ICT growth shifted demand from middle-educated workers to highly educated workers, consistent with ICT-based polarization.

    Further reading:
    Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years - this has subsequently been published in The Review of Economics and Statistics, 2014.

    Job Polarisation in Europe

    In a European context, a paper by Maarten Goos, Alan Manning and Anna Salomons (2010) considers 16 European countries, and quantifies the roles of technology, globalisation (off-shoring) and wage institutions in explaining job polarisation. Again the application of technology to jobs is the most important explanatory factor.

    Further reading:
    Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions.

    Polarisation and the 'squeezed middle'

    Michael Boehm (2013) looks at the US context, finding that job polarisation has had strong effects on US workers' relative wages. His study examines whether the decline in manufacturing and clerical jobs has been responsible for the lagging wages of middle-skill workers in the United States. Comparing the occupational choices and earnings of survey respondents in the 1980s and today, he shows that labour market returns to middle-skill jobs have declined relative to high- and low-skill jobs.

    Further reading:
    Has Job Polarization Squeezed the Middle Class? Evidence from the Allocation of Talents.