This paper uses the Census, the General Household and New Earnings Surveys, and OECD data, to look at trends in the dispersion of pay and the returns to education, the supply of and demand for different types of labour and the supply of qualifications. It casts doubt on the ability of a simple demand and supply framework to explain much of the widening in pay inequality in Britain since the late 1970s. Instead it argues that Britain has witnessed a unique set of institutional changes which, in combination with the non-competitive functioning of labour markets, have generated greater pay inequality. Some of these same institutional changes have also contributed significantly to rising aggregate unemployment. Rising unemployment or rising pay inequality may not then be alternative options at all, but the price to be paid for naively believing that labour markets do or should work as they are supposed to in a simple competitive model.

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Peter Robinson

August 1994     Paper Number CEPDP0206