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The Evolution of Inequality in Productivity and Wages: Panel Data Evidence

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  • Giulia Faggio
  • Kjell Salvanes
  • John Van Reenen

Abstract

There has been a remarkable increase in wage inequality in the US, UK and many other countries over the past three decades. A significant part of this appears to be within observable groups (such as age-gender-skill cells). A generally untested implication of many theories rationalizing the growth of within-group inequality is that firm-level productivity dispersion should also have increased. Since the relevant data do not exist in the US we utilize a UK longitudinal panel dataset covering the manufacturing and non-manufacturing sectors since the early 1980s. We find evidence that productivity inequality has increased. Existing studies have underestimated this increased dispersion because they use data from the manufacturing sector which has been in rapid decline. 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 as suggested by models such as Caselli (1999) and is not primarily due to an increase in transitory shocks, greater sorting or entry/exit dynamics.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0821.

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Date of creation: Aug 2007
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Handle: RePEc:cep:cepdps:dp0821

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: wage inequality; productivity dispersion; technology;

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  1. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 461-498, June.
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  6. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, American Economic Association, vol. 89(2), pages 94-98, May.
  7. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Rising Wage Inequality: The Role of Composition and Prices," NBER Working Papers 11628, National Bureau of Economic Research, Inc.
  8. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  9. Violante, Giovanni L, 2001. "Technological Acceleration, Skill Transferability and the Rise in Residual Inequality," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2765, C.E.P.R. Discussion Papers.
  10. Rasmus Lentz & Dale T. Mortensen, 2005. "Productivity Growth And Worker Reallocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 731-749, 08.
  11. David Card & Thomas Lemieux, 2000. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," NBER Working Papers 7655, National Bureau of Economic Research, Inc.
  12. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1777, Harvard - Institute of Economic Research.
  14. Van Reenen, John, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U.K. Companies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 195-226, February.
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