Rising Wage Inequality, Returns to Education and Labour Market Institutions: Evidence from Ireland
| Date | 01 March 1999 |
| DOI | http://doi.org/10.1111/1467-8543.00119 |
| Published date | 01 March 1999 |
| Author | Tim Callan,Brian Nolan,Alan Barrett |
Rising Wage Inequality, Returns to
Education and Labour Market
Institutions: Evidence from Ireland
Alan Barrett, Tim Callan and Brian Nolan
Abstract
Institutional factors and increased supply of skilled labour have been
advanced in an effort to explain why some countries have experienced
smaller increases in earnings dispersion and in returns to education than the
USA and the UK. Ireland has had a highly centralized wage bargaining
structure and the supply of skilled labour has increased sharply in recent
years; hence, relatively little change in earnings dispersion might be expected.
We compare the distribution of earnings in Ireland in 1987 and 1994 and ®nd
a surprisingly large growth in earnings dispersion. In addition, using a
decomposition technique, we ®nd that much of this is accounted for by
increasing returns to measured characteristics.
1. Introduction
Explanations of widening earnings dispersion in the United Kingdom and
the United States in recent years have highlighted rising returns to
education and skill.
1
This in turn has been attributed to a shift in demand
towards more skilled labour owing to factors such as skill-biased technical
change (Katz and Murphy 1992) and globalization and competition from
developing countries (Wood 1994).
2
Some industrialized countries have
experienced much smaller increases in inequality, however, while others
have maintained stability in their earnings distributions (OECD 1993,
1996b). This has focused attention on the role of institutional factors.
Countries such as Sweden, Germany and the Netherlands, which have seen
little or no increase in earnings inequality, have some form of centralized
wage bargaining. This has led to the hypothesis that these wage-setting
institutions were the primary factor limiting the growth in inequality in
those countries.
3
By contrast, labour market deregulation and declining union member-
The authors are at the Economic and Social Research Institute, Dublin.
British Journal of Industrial Relations
37:1 March 1999 0007±1080 pp. 77±100
#Blackwell Publishers Ltd/London School of Economics 1999. Published by Blackwell Publishers Ltd,
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ship are widely seen to have played a role in widening dispersion in the
USA and especially in the UK, where the role of labour market institutions
declined very rapidly during the 1980s and early 1990s (Machin 1997). In
particular, Machin and Manning (1994a) and Machin (1997) point to effects
on UK wage inequality of the virtual elimination of minimum wages
through the abolition of the wages councils; Gosling and Machin (1995) and
Machin (1997) identify the decline of unions as an important cause; and
Leslie and Pu (1996) argue for the importance of changes in collective
bargaining arrangements. Declines in unionization and the real value of the
minimum wage have also been advanced as important factors in rising US
earnings dispersion by, for example, Freeman (1993), DiNardo et al. (1996),
and DiNardo and Lemieux (1997).
Against this background Ireland offers a particularly interesting com-
parative case study of a country where the strength of labour market and
associated institutions has been increasing rather than declining, where the
supply of skilled labour has been increasing very rapidly, and where we
none the less ®nd that wage dispersion has increased very rapidly. As a
small and extremely open economy, Ireland is open to the same shifts in
demand for labour of different types as occur in the rest of the developed
world. There has been a very rapid increase in the level of educational
attainment of the Irish labour force in recent years, with almost half the
cohort currently leaving the educational system having some third-level
education. The Irish labour market has also been characterized by highly
centralized wage bargaining over this period, enhancing the role of unions;
moreover, minimum wage coverage has widened, and the ¯oor provided by
welfare bene®ts for the unemployed has risen in relative terms. Against
that background, we ®nd that between 1987 and 1994 Ireland experienced
an increase in earnings inequality that was very substantial compared with
other countries, even the UK and USA, and that a signi®cant part of the
increase is explained by increases in the returns to education. This points to
the strength of the shift in demand for skills in the Irish case, in¯uenced by
the openness of the economy and the role of foreign direct investment.
The paper is structured as follows. Section 2 describes the institutional
background. Section 3 describes the data to be used. Section 4 examines
trends in the overall earnings distribution in Ireland between 1987 and 1994
and puts the increase in dispersion that this reveals in comparative
perspective. Section 5 focuses on the education levels attained by the
labour force each year, and the way earnings dispersion within and between
education levels and age groups have evolved. Section 6 analyses rates of
return to education via estimation of conventional human capital earnings
functions and looks at how these have changed between 1987 and 1994.
Section 7 looks at the contribution of changing rates of return to education,
and changes in the educational pro®le of the labour force, to the observed
trends in the earnings distribution. Section 8 summarizes the conclusions.
#Blackwell Publishers Ltd/London School of Economics 1999.
78 British Journal of Industrial Relations
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