Returns to Skills and the Distribution of Wages: Spain 1995–2010

Published date01 August 2015
Date01 August 2015
©2014 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
doi: 10.1111/obes.12077
Returns to Skills and the Distribution ofWages: Spain
Raquel Carrasco, Juan F. Jimeno‡ and A. Carolina Ortega§
Departamento de Econom´ıa, Universidad Carlos III de Madrid, Calle Madrid 126, Getafe
28903, Madrid, Spain (e-mail:
Banco de Espa˜na, Calle de Alcal´a 48, 28014, Madrid, Spain
§Universidad Nacional de Tucum´an, Avenida Independencia 1900, San Miguel de Tucum´an
4000, Tucum´an, Argentina
In contrast to the pattern observed in other developed countries, the Spanish wage distri-
bution compressed between 1995 and 2006 and became more disperse afterwards, so that
in 2010 wage inequality was roughly similar to 1995. In this paper, we analyze the role
of supply and demand factors when accounting for these facts. We start by decomposing
observed wage changes into changes in the composition of the labour force and changes in
the returns of workers’ and jobs’characteristics. The results indicate that the compression
of the wage distribution between 1995 and 2006 is largelyexplained by changes in returns,
and particularly, by a decrease in the returns to education. We show that both the increase
in the supply of high-skilled workers and the increasing weightof low-skilled occupations
are related to the decreasing trend in the skill premium over this period. In contrast, the
widening of the wage distribution after 2006 is largely explained by an increase in the
relative demand for high-skilled workers generating an increase in the school premium.
I. Introduction
There is a general consensus that the wage distribution widened during recent decades in
most Anglo-Saxon countries (Goos and Manning, 2007; Autor, Katz and Kearney, 2008),
as well as in some continental European countries, such as Germany (Dustmann, Lund-
steck and Sch¨onberg, 2009) and Portugal (Centeno and Novo, 2009). This trend is usually
associated with skill-biased technological progress that results in higher wage premia for
education and experience. As for the Great Recession, most studies have focused on con-
sumption and income inequality (see, for instance, Attanasio, Hurst and Pistaferri, 2012)
*We are grateful to OlympiaBover, Antonia D´ıaz, Joan Llull, Elena Mart´ınez–Sanch´ıs, Hip´olito Sim ´on, and two
anonymous referees for comments on a previous draft of this paper and to participants in the XXXVI SAE and in
Banco de Espa˜na, Universidad Aut´onoma de Barcelona, and Universidad Aut´onoma de Madrid seminars for helpful
comments. The first author acknowledges research funding from the Spanish Ministry of Science and Innovation,
Grants No. ECO2009-11165 and ECO2012-31358. All remaining errors are our own.
JEL Classification numbers: J31, J21.
Returns to Skills and the Distribution of Wages 543
but the available data suggest that, if anything, earnings and wage inequality continued
In contrast, there is evidence of a fall in wage inequality in some other European
countries during the same period. For instance, Verdugo (2013) shows that in France wage
inequality decreased continuously from 1969 to 2008; Naticchioni and Ricci (2009) find
the same result in Italy from 1993 to 2006, and that for the highest percentiles this was
mainly related to a fall in the educational wage premium.
Within this context, the evolutionof wage inequality in Spain seems somehow puzzling.
As seen in Figure 1,1between 1995 and 2002, wages decreased throughout the entire
distribution, except for the highest deciles, and the wage distribution compressed around
a lower mean. Between 2002 and 2006, the wage distribution did not basically change,
and it is only between 2006 and 2010 when wage increases are observed for all deciles,
ranging from 10% to 20% as we move up along the wage distribution. This has also been
documented by Bonhomme and Hospido (2012) who found that wage inequality in Spain
decreased at a rate similar to that of the observed rise in other countries since the early
1990s up to the beginning of the current crisis, and by Casado and Sim´on (2013) who
offered further evidence of an increase in inequality from 2006 to 2010.
In this paper, we use a simple labour supply and demand framework to investigate
several possible explanations for the development of the Spanish wage structure during the
period 1995–2010. We first document the importance of distinguishing between changes
in the composition of employment and changes in the returns to specific workers’and jobs’
characteristics to explain the observed wage evolution.Among the most relevantf actors that
might imply significant composition effects on the supply side are the educational upgrade
of the labour force (see Lacuesta, Puente and Cuadrado, 2010) and huge immigration flows
(see Carrasco, Jimeno and Ortega, 2008).2On the demand side, major factors include the
increasing importance of the construction sector, which leads to an increasing share of
low-paid workers (see Gonzalez and Ortega, 2013).3Using the quantile decomposition
technique proposed by Machado and Mata (2005), our results show that it is a decrease in
the returns to education which explains the lack of wage growth and the compression of
the wage distribution during the period 1995–2006.4In contrast, the widening of the wage
distribution after 2006 is largely explained by an increase of the returns to schooling.
1During the period 1995–2006, the Spanish economyexperienced a long and strong expansion with significant real
GDP growth (an annual growth rate of approximately 4%), a decreasing unemployment rate (14 percentage points
over the period), and increasing employment creation. However, despite the large increase in labour demand, wage
pressures remained subdued with aggregate real wages decreasing at annual rates of 0.5% and 0.3% in 1995–
2000 and 2000–05, respectively (OECD, 2007).The recession started in 2008, with GDP growth rates of 3.7% and
0.3% in 2009 and 2010, respectively, has seen a moderate increase in the aggregate real wage of 0.03% in 2009
and a moderate decrease of 0.008% in 2010.
2Another important change over this period is the variation in the gender composition of the labour force. In this
paper, we follow a long-standing tradition in the analysisof the wage structure and focus on male wage distributions
to abstract from fertility decisions which mainly affect female labour supply. Moreover, the increase in the female
labour force participation rate is likely to have changed the selection of women into work,which may have had an
independent impact on the female wage structure.
3Low real interest rates and lax credit conditions, together with some changes in the regulation of urban land,
contributed to a boom in the construction sector (see Arce, Campa and Gavil´an, 2012).
4Izquierdo and Lacuesta (2012) found similar conclusions for Spain using the non-parametric technique proposed
by DiNardo, Fortin and Lemieux (1996).
©2014 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd

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