Behind the North-South divide: A decomposition analysis

The paper applies modified Oaxaca-type analyses on the eighteen available waves of the British Household Panel Survey to decompose the wage gap among full time employees from either side of the North-South divide and identify its components that can be attributed to measurable worker- and labour market characteristics, and the part due to differences in the returns to these endowments. Further, by applying Juhn, Murphy and Pierce’s (1991) methodology, it is analysed, how changes in these underlying factors could explain the one quarter decline in the wage gap over the 1991 – 2009 period. The paper confirms the existence of a differential treatment effect by showing that only one fifth of the wage gap can be explained by observable differences. The magnitude of the unexplainable coefficient effect is so large, that the remarkable improvements in Northern occupational structure and human capital levels over the period could only translate into an actual decline in the wage gap, because it coincided with a period of increasing inequality among Northern occupational wage premia, which – as a by-product – increased the average Northern wage and this way counterbalanced the effects of the increasing Southern returns to experience, that alone could have increased the initial pay gap by half.