‘ Have earnings polarised in the UK?

‘Have earnings polarised in the UK? Craig Holmes Pembroke College, Oxford University and SKOPE ISER, University of Essex, October 21st 2013

Outline • Background on the hourglass labour market • Polarisation and earnings distributions – some theory • Methodology – earnings distribution decomposition • Data • Decomposition results • Discussion and future work

Background • Routinisation hypothesis (Autor, Levy and Murnane, 2003): • Refinement of SBTC - technology related to tasks, not skills • Routine tasks substitutable for computer capital • Growth in non-routine jobs, decline in routine jobs • Polarization hypothesis (Goos and Manning, 2007) • Routine occupations found in middle of income distribution • Non-routine occupations found at top and bottom of distribution • Ranking of jobs based on initial wages

Background • Goos and Manning (2007) – 1979-1999:

Background • Similar results observed in: • US (Autor, Katz and Kearney, 2006; Caranci and Jones, 2011) • Germany (Spitz-Oener, 2006; Oesch and Rodríguez Menés, 2011) • Spain and Switzerland (Oesch and Rodríguez Menés, 2011) • Across Europe (Goos, Manning and Salomons, 2009) • Other explanations have been put forward: • Offshoring • Growing wage inequality and demand for services

Background • Wage inequality in the UK has risen since the 1980s

Background • Earnings growth by percentile, UK

Background • More high-wage and low-wage jobs  More inequality

Background • Two main research questions: • To what extent has the shift towards non-routine employment decreased the number of middle wage jobs / increased wage inequality • Why, given that, has earnings distribution polarisation halted since mid 1990s?

Polarisation and earnings distributions • The shift away from routine work should increase the number of high-wage and low-wage jobs, everything else being equal

Polarisation and earnings distributions • However, wage structure of occupations unlikely to remain constant • Autor, Katz and Kearney (2006) – relative wage of routine occupations falls • “Wage polarisation” – a US phenomenon? • Wage differences between different non-routine occupations (Williams, 2012) • Other compositional changes – more educated workforce, lower union membership, greater female participation • Non-uniform increase in demand for non-routine tasks? • Change in returns to other characteristics

Methodology • Standard quantileregressions compute quantiles of a distribution conditional on explanatory variables • However, we need to decompose unconditional distributions • Firpo, Fortin and Lemieux (2009) – two stage approach • Estimate a counterfactual distribution via reweighting initial distribution • Use re-centered influence functions to estimate distributional statistics (such as percentiles) as a linear expression of main explanatory variables

Methodology • Data: • N observations, N0 from initial distribution, N1 from final distribution • Ti = 1 if from final distribution, i = 1,...,N. Pr(Ti) = p • Data can be reweighted • Reweighting: • where p(X) = Pr (T=1|X)

Methodology • This counterfactual can be used to decompose wage and composition effects of a distributional statistic: • An recentered influence function of v(F) measures its sensitivity to each observation, where E(RIF) = v(F) • Assumea linear projection of RIF onto X: • where j = {0, C, 1}

A quantile regression approach • Hence: • This is a more general case of the Blinder-Oaxaca decomposition, where v(F) is the mean.

Data • Family Expenditure Survey, 1987-2001 • Around 10,000 observations each year • Usual gross pay and usual hours of work • Education – year left FT education  four levels • Union membership – subscription fees>0 • Quarterly Labour Force Survey, 1994-2007 • Around 150,000 observations each quarter (5 quarter membership) • Gross hourly pay directly reported • Educational qualifications • Union membership directly reported

Data

Composition and wage effects • FES, 1987-2001:

Composition and wage effects • LFS 1994-2007:

Composition and wage effects • Both periods find compositional changes decreasing the number of middle-wage jobs • Wage structure changes reverse this – partially in the 1987 and 2001, and completely between 1994 and 2007

Individual composition effects

The wage structure - aggregate

The wage structure - occupations

The wage structure - education

Discussion • Wage structure reduces increase in inequality, despite change in composition on the workforce • However, hard to interpret as educational or occupational opportunities pulling the middle up – despite the “room at the top” mindset of policymakers • An alternative interpretation – downward sloping wage structure is a ‘correction’ of compositional changes – not as many people in high wage jobs as we’d predict

Discussion • Minimum wage has clearly having an effect at low-end • However, other wage structure effects also helping to reduce lower-tail inequality e.g. male-female wage gaps, relative pay of service jobs

Discussion • Increasingly heterogeneous occupational groups

Discussion • Unrelated to educational attainment? Graduates only:

Discussion • This could reflect a supply problem if it reflects quality of graduates • Could also reflect suitability of university route into labour market vs. vocational education • Can not ignore changes on the demand side – in particular, are technology and skilled labour always complements? • Brown, Lauder and Ashton (2011): • “Knowledge work”  “Working knowledge” • “Digital Taylorism” – deskilling of high skill work • “War for Talent” – high premium paid for small pool of graduates at top universities

Discussion • So far, defined high wage job as a fixed multiple of median pay • However, the size of the wage spectrum is relevant • Very high pay is increasing, even while high pay remains constant • Some higher paid workers move closer in relative terms to the middle as the top experience very rapid wage growth • What is an appropriate cut-off for these groups?

Conclusion • Main points: • Earnings distributions polarised during 1980s and 1990s • This polarisation was less than compositional shifts would have predicted • Middle paying jobs stop declining in middle of 1990s, despite continuation of compositional shifts • Areas for future investigation: • Educational attainment and occupational demands do not seem to be offering opportunities to narrow earnings inequality • What happens to occupational mobility, particularly at low end? • What has happened since 2007?

Contact Details Craig Holmes Pembroke College, Oxford, and ESRC Centre on Skills, Knowledge and Organisational Performance (SKOPE), Email: craig.holmes@pmb.ox.ac.uk

‘ Have earnings polarised in the UK?