Wage Frontiers in Pre & Post-Crisis Spain: Implications for Welfare and Inequality

This paper explores the evolution of wages in Spain using a stochastic frontier approach (SFA) to estimate the wage frontiers of workers in Spain as a function of their human capital (education, experience and occupation), year and region. Once the wage frontier has been estimated an analysis is made of determinants (type of contract, economic cycle, gender and region), which may contribute to the workers having difficulties in achieving their maximum attainable potential salary. Given our specific interest in comparing wages before and after the crisis, we monitor the effect on hourly wage of changes in the level of Spanish Gross Domestic Product for the period 2004-2015. For this purpose, a panel data model (Greene, 2005) is used to estimate the stochastic frontier. The data is obtained from the Spanish Living Conditions Survey. Coinciding with three waves (2004-2007, 2008-2011 and 2012-2015) of the SCLS, our database conveniently encompasses differing economic cycles for estimation. Results show that the difficulty of workers in achieving their potential wage is greater at the end of the post-crisis period than the pre-crisis period. Whilst serving to throw some light on the potential and real wages available to Spanish workers before and after the onset of the economic crisis, the paper also offers a brief glimpse of the effect on individual welfare and evidence of an increasing trend in inequality in the post-crisis period.