Recent Changes in British Wage Inequality: Evidence from Large Firms and Occupations
| Date | 01 February 2020 |
| Author | Carl Singleton,Daniel Schaefer |
| DOI | http://doi.org/10.1111/sjpe.12225 |
| Published date | 01 February 2020 |
RECENT CHANGES IN BRITISH WAGE
INEQUALITY: EVIDENCE FROM
LARGE FIRMS AND OCCUPATIONS
Daniel Schaefer* and Carl Singleton**
ABSTRACT
Using a linked employer–employee dataset covering large firms, we present new
evidence on British wage inequality trends over the past two decades. Differences
between firms in the average wages they paid did not drive these trends. Between
1996 and 2005, greater wage variance within firms accounted for 86% of the
total increase in wage variance among employees. In the following decade, wage
inequality between firms continued to increase, whereas overall wage dispersion
decreased. Approximately all the contribution to inequality dynamics from esti-
mated firm-specific factors, throughout the employee wage distribution, disap-
pears after accounting for the changing occupational content of wages.
II
NTRODUCTION
The long-term trend of rising wage inequality in Great Britain has been exten-
sively documented (Hills et al., 2010; Machin, 2011; Belfield et al., 2017). The
majority of this increase in Britain occurred in the 1980s, and has tended to
occur within observable sub-groups of workers and firms, such as education
levels and industry sectors, as in the United States and several other countries.
Although well-studied, some ambiguity remains over what drives changes in
the wage distributions of labour markets such as Britain’s. This paper con-
tributes to answering this question in two ways. First, we use a new source of
linked employer–employee data to ask how much have differences between
firms, relative to within, accounted for recent wage inequality trends in Bri-
tain. The answer to this question is particularly relevant for policymakers,
given the recent public focus on income inequality: for example, if firms were
the main drivers of rising inequality, then corporation taxes could be more
suitable to reverse inequality trends than income taxes. Second, unlike similar
datasets in other countries, our data include detailed descriptions of employee
occupations, and thus we ask how occupational polarisation affects between-
and within-firm inequality trends.
*University of Edinburgh
**University of Reading
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12225, Vol. 67, No. 1, February 2020
©2019 Scottish Economic Society.
100
Among full-time employees in Britain, we find that over 80% of the
increase in the variance of log weekly wages between 1996 and 2005 occurred
within firms. In the subsequent decade overall inequality decreased, whereas
the dispersion of average firm wages increased. We document similar results
for hourly and annual wages. Previously, Faggio et al. (2010) have found that
rising wage inequality in Britain in the 15 years prior to 1999 was almost
entirely accounted for by an estimate of between-firm variance. A contribution
of our paper is to extend these previous results, using the same survey data of
wages and hours, but by instead matching a representative sample of employ-
ees to the majority of large firms. This provides us with a robust sample of
employer–employee linked jobs, as opposed to using some separate source to
estimate firm average wages; Faggio et al. (2010) lacked data on the wages
within specific firms. Mueller et al. (2017) have also studied British wage
inequality from the firm’s perspective. Using data on average pay at hierarchy
levels in a small number of firms, they found substantial within-firm inequality
in the years 2004–2013 and that this tended to increase as firms grew. They
also suggested that overall wage inequality trends could be related to an
increasing concentration of employment in larger firms.
Several studies of other countries have documented that trends in employee
wage inequality and the dispersion of firm productivity or firm average wages
tend to coincide (see among others for the United States: Davis and Halti-
wanger, 1991; Dunne et al., 2004; Barth et al., 2016; Song et al., 2019. For Swe-
den: Nordstr€
om Skans et al., 2009; Akerman et al., 2013. For West Germany:
Card et al., 2013. For Brazil: Alvarez et al., 2018; Helpman et al., 2017. For
Eastern Europe: Gromadzki et al., 2019. See also the literature review by Card
et al., 2018). At first look our results for Britain would appear to conflict with
this wider literature. The data that we use are a 1% random sample of employ-
ees, and so we mostly limit our attention to large firms, representing approxi-
mately 40% of all UK employment. The overall patterns in wage inequality for
this 40% is not dissimilar to the whole UK economy. But Song et al. (2019)
have shown that the contribution of between-firm wage dispersion to overall
changes is smaller among larger US firms. Although our results are robust to
varying how we select the sample of employees, and consequently to increasing
or decreasing the average firm size, we would advise some caution in comparing
our findings to those found elsewhere using more widely representative data.
Nonetheless these British data offer some clear advantages. They are con-
sidered to be accurate records from firms’ payrolls (Nickell and Quintini,
2003), giving measures of annual and weekly earnings, and their constituent
components, including hours worked. Using information which firms provide
on their employees’ occupations, we ask how much of the estimated contribu-
tion from firm-specific differences to wage inequality changes is accounted for
by the observed occupational content of wages. The answer is approximately
all of it, throughout the wage distribution. Some combination of changes to
between-occupation inequality and the sorting of occupations across firms
accounts for changes in the dispersion of firm-specific wages over the last two
decades in Britain.
RECENT CHANGES IN BRITISH WAGE INEQUALITY 101
Scottish Journal of Political Economy
©2019 Scottish Economic Society
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