Employment composition and labour earnings inequality within EU countries

This paper presents a novel methodology that combines different datasets to decompose estimated changes in labour earnings inequality into the contributions of a number of employment characteristics. Based on this approach, we provide empirical evidence for recent developments in 18 EU countries starting in 2000. We find that the common upward trend in inequality is related to shifts in the composition of employment within sectors, rather than to sectoral reallocation. In particular, we estimate that the expansion of part-time and fixed-term contracts, as well as the higher share of tertiary educated workers within sectors, have been the main contributors to the rise of earnings inequality. Cross-country differences are exacerbated when taking into account unemployed population due to divergent capacities to create jobs in face of successive economic crises and external competition. In policy terms, a specific concern deals with the possibility that a higher share of flexible contractual arrangements is masking the rise of underemployment. On a broader perspective, we deem that the overall growth and competitiveness strategies are essential within the fairness agenda, while the enhancement of education, social and income-redistribution tools is needed to face economic and technological challenges in the most inclusive way possible.