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

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Author Info
Giulia Faggio
Kjell Salvanes
John Van Reenen

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Abstract

There has been a remarkable increase in wage inequality in the US, UK and many othercountries over the past three decades. A significant part of this appears to be withinobservable groups (such as age-gender-skill cells). A generally untested implication of manytheories rationalizing the growth of within-group inequality is that firm-level productivitydispersion should also have increased. Since the relevant data do not exist in the US we utilizea UK longitudinal panel dataset covering the manufacturing and non-manufacturing sectorssince the early 1980s. We find evidence that productivity inequality has increased. Existingstudies have underestimated this increased dispersion because they use data from themanufacturing sector which has been in rapid decline. Most of the increase in individual wageinequality has occurred because of an increase in inequality between firms (and withinindustries). Increased productivity dispersion appears to be linked with new technologies assuggested by models such as Caselli (1999) and is not primarily due to an increase intransitory shocks, greater sorting or entry/exit dynamics.

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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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Related research
Keywords: wage inequality; productivity dispersion; technology;

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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June. [Downloadable!]
  2. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. 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, vol. 111(1), pages 195-226, February. [Downloadable!] (restricted)
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  4. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March. [Downloadable!] (restricted)
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  5. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. John C. Haltiwanger & Julia I. Lane & James R. Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August. [Downloadable!] (restricted)
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  9. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November. [Downloadable!] (restricted)
  10. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
  11. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
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  12. Giovanni L. Violante, 2002. "Technological Acceleration, Skill Transferability, And The Rise In Residual Inequality," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 297-338, February. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. ITO Keiko & Sebastien LECHEVALIER, 2008. "The evolution of the productivity dispersion of firms - A reevaluation of its determinants in the case of Japan," Discussion papers 08014, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  2. Vona, Francesco & Consoli, Davide, 2009. "Innovation, human capital and earning distribution: towards a dynamic life-cycle approach," MPRA Paper 13032, University Library of Munich, Germany. [Downloadable!]
  3. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2008. "Wages, Unemployment and Inequality with Heterogeneous Firms and Workers," NBER Working Papers 14122, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Hartmut Egger & Udo Kreickemeier, 2008. "Fairness, Trade, and Inequality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. Fujiwara, Yoshi & Iyetomi, Hiroshi & Ikeda, Yuichi & Souma, Wataru, 2009. "Distribution of Labour Productivity in Japan over the Period 1996?-2006," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(14), pages 1-14. [Downloadable!]
  6. Souma, Wataru & Ikeda, Yuichi & Iyetomi, Hiroshi & Fujiwara, Yoshi, 2009. "Distribution of Labour Productivity in Japan over the Period 1996?-2006," Economics Discussion Papers 2009-2, Kiel Institute for the World Economy. [Downloadable!]
  7. Zizi Goschin, 2007. "Spatial and sectoral analysis of productivity-wage dissimilarities in Romania," Romanian Journal of Regional Science, Romanian Regional Science Association, vol. 1(1), pages 33-44, December. [Downloadable!]
  8. Elhanan Helpman & Oleg Itskhoki & Stephen Redding, 2009. "Inequality and Unemployment in a Global Economy," CEP Discussion Papers dp0940, Centre for Economic Performance, LSE. [Downloadable!]
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