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Wage inequality, skill inequality, and employment: evidence and policy lessons from PIAAC

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  • Sonja Jovicic

    (Schumpeter School of Business and Economics, University of Wuppertal)

Abstract

This paper investigates international differences in wage inequality and skills and whether a compressed wage distribution is associated with high unemployment across core OECD countries. Wage dispersion and wage structure are widely debated among policymakers; compressed wage structure is often perceived as an important cause of high unemployment. Firstly, this paper examines differences in wage dispersion across OECD countries and their link to skill dispersion. Some countries that have more compressed (dispersed) wage structures simultaneously have more compressed (dispersed) skill structures as well, and skill differences explain part of the differences in wage dispersion. However, even when accounted for skills, some countries have a more compressed wage structure, most likely caused by labor market institutions. We do not find an effect of wage compression on the labor market performance in the low-skill sector. Based on the Program for International Assessment of Adult Competencies (PIAAC) survey of adult skills for core OECD countries, this paper cannot confirm the skill compression nor wage compression hypotheses. Rather than insisting on the deregulation of labor market institutions and reductions in public welfare policy as the main policy recommendations to achieve higher employment (and higher wage inequality), policymakers should reconsider aggregate demand deficiency and the variation in macroeconomic policies as potential explanations for the employment differences across countries. JEL Classification: J31, J24, E24

Suggested Citation

  • Sonja Jovicic, 2016. "Wage inequality, skill inequality, and employment: evidence and policy lessons from PIAAC," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-26, December.
    • Handle: RePEc:spr:izaels:v:5:y:2016:i:1:d:10.1186_s40174-016-0071-4
    DOI: 10.1186/s40174-016-0071-4
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    Cited by:

    1. Broecke, Stijn & Quintini, Glenda & Vandeweyer, Marieke, 2017. "Explaining international differences in wage inequality: Skills matter," Economics of Education Review, Elsevier, vol. 60(C), pages 112-124.
    2. Tsampra, Maria & Bouranta, Nancy & Gkerats, Reveka, 2017. "Regional patterns of employability in the Greek Labour market," MPRA Paper 82275, University Library of Munich, Germany.
    3. Ashley Pullman & Britta Gauly & Clemens M. Lechner, 2021. "Short-term earnings mobility in the Canadian and German context: the role of cognitive skills," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 55(1), pages 1-19, December.
    4. Raquel Fonseca & Marie Mélanie Fontaine & Catherine Haeck, 2021. "Le lien entre les compétences en numératie et les rendements sur le marché du travail au Québec," CIRANO Project Reports 2021rp-11, CIRANO.
    5. Jovicic, Sonja, 2017. "Literacy skills, equality of educational opportunities and educational outcomes: an international comparison," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168117, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Wage distribution; Earnings; Skill distribution; Employment;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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