The trends were similar in the UK. The difference between the UK and the US is that real earnings for all workers rose in the UK, so that despite increasing inequality, the real earnings for those at the bottom of the distribution grew. In the US real earnings at the bottom of the distribution fell sharply. From 1979 to 198, the real earnings of lower-decile American males dropped by 11-17% compared to an increase in the real earnings of lower decile British males (Freeman and Katz 1995). Therefore lower-paid American workers suffered the largest erosion in economic well-being among advanced countries. The reduction on the male-female wage gap in the U.S was however an achievement.
Let us look at the changes in other advanced countries. From the late 1960’s to the late 1970’s, all the countries shared a common pattern of narrowing educational (rate of return) and occupational wage differentials and a more compressed wage structure. In the 1980’s educational differentials moved differently. Canada, Australia, Japan, and Sweden had small increases in educational differences. Germany had none at all and
Wage differentials continued to narrow in Italy and France.
Comparison of GERMANY with its training/ apprenticeship program
Conclusion
So why did the US and the UK, follow a different path. According to Freeman and Katz (1995) the Supply-Demand-Institution (SDI) explanation of relative wage determination and has three parts. Firstly, shifts in the supply of and demand for labour skills substantially alter wage and employment outcomes. This requires that shifts affect the wages and employment of different groups of workers. Hence different demographic, education and skill groups are imperfect substitutes in production. Freeman (1974) argues that this shifts have there greatest affects on young or less experienced workers.
Since developed economies operate in the same world markets with similar technology, changes in demand move in broadly similar ways across countries, which mean we need to analyse other factors. The supply of skilled labour will diverge across countries, since different countries expanded their higher education systems at different times, but even so the proportion of the workforce that is highly educated has risen in all advanced countries. Thus further factors need to be considered.
So secondly, country differences in labour market institutions are another important determinant of differing patterns of inequality. The more centralized a wage-setting system and the stronger the role of institutions in wage determination, the smaller will be the effect of shifts in supply and demand on relative wages, and, as a consequence, the greater will be their effect on relative employment. Lynch (1994) also argues education and training market institutions which determine the level of workplace skills for the less educated will also mediate the effect of market forces on wages and employment. Also social insurance and income maintenance institutions, which are generous, allow workers to remain jobless for a longer period can reduce their willingness to take low wages to obtain work reducing the supply side pressures that force low-skilled pay down.
Thirdly, the changes that occur institutionally and politically such as product market deregulation and changes in unionization (as in the U.S) play an important role. There is a dual causality issue though in that these institutions respond to the changes in supply and demand and are not just exogenous.
Let us look at how this framework can help us analyse the different outcomes of the US and the UK.
Labour demand factors (i.e. the increasing demand for skilled labour) do not explain much of the differential growth of wage inequality or educational earnings differentials among countries in the 1980’s. The shift in labour demand appears to be driven in part by skill-biased technological change partially associated with the “computer revolution” and by growing internationalization of trade with NIC’s and LDC’s, and immigration. All advanced economies experienced large, steady shifts in the industrial and occupational structure of employment toward sectors and job categories that use a greater proportion of more educated workers (OECD 1994b). The share of employment in manufacturing declined everywhere. It particularly hit Britain which was undergoing severe de-industrialisation though.
Differential growth in the supply of workers by level of education, by contrast contributed to the greater rise in educational wage differentials in the US and UK than in other countries in the 1980’s. While the educational qualifications of workers trended upward in all countries, the growth of the college and university educated workforce decelerated in the US and UK. Hence returns rose. Cross country patterns show that with at least modest increases in skill differentials by the end of the decade such as the US, UK, Sweden, Japan, and Australia experienced some decline in the growth rate of the supply of college graduates. Countries whose educational differentials did not expand in the 1980’s such as France and Germany essentially maintained the 1970's rate of growth of supply of more educated workers into the 1980’s.
So while we understand that the demand for skill intensive technologies (demand moving away from low-skilled manual industry) outstripped the supply of skilled workers, which created a widened wage spectrum, the differences in inequality growth still remain large between the U.S, the UK and other advanced countries.
Was there another factor that ameliorated the market forces of supply and demand?
The role of wage setting institutions and the changes in these institutions were crucial.
In the US market forces have traditionally had a more important role in wage setting than that by institutions. Calmfors and Driffil (1988) produce a humpback curve showing that the U.S. is clearly not a centralized wage setting country. In the UK, the move towards decentralised collective bargaining is very important. By the mid 1990’s only a minority of workers were covered by collective bargaining compared with 73% at its 1973 peak.
Unionisation fell in many countries in the 1980’s (OECD 1991) however this share dropped precipitously in the UK, US, Netherlands and France. But because Union membership does not have the same meaning in different labour relations settings, however, even similar declines in density have different effects on the labour market. In the UK and US reduced Union density meant a decreased role for collective bargaining and institutional forces in wage setting. But in France, falling unionization did not diminish the importance of the national minimum wage setting and it was accompanied by an increasing number if plant-level collective contracts. In Germany the retention of Unionism and the strong training market institutions such as the apprenticeship schemes have strongly resisted the inequality in skills that leads to inequality in pay.
Overall, weakened unionism and reduced centralisation of wage setting contributed to the cross country pattern of change in wage inequality in the 1980’s. In the UK, the fall in union density accounts for about one-quarter of the growth in wage inequality among males (Schmitt 1994). The Italian and French models of wage setting, while successful in preventing the wage structures from widening throughout the 80’s did not however directly deal with the changing demand for skills and this is something that may hurt them in the long run.
We have to remember that these institutional changes that occurred are not simply exogenous but are themselves influenced by market forces. Economic forces that raise relative wages are likely to lead to less centralized collective bargaining or a reduction in union influence in wage setting. Hence the increasing product market competition and the internationalization of trade and the skill biased technological change that went with it reduced the power of wage setting institutions and the demand for them. Of course in the UK, the Thatcher Governments distrust and hatred of the unions was a politically driven factor that further accelerated reduced unionism within the UK.
In conclusion we see that the skill biased technological change industry is going through is a very important vehicle for the trends in inequality that we are now seeing. For this is driving the demand for skilled labour and this in turn interacts with the level of supply of skilled workers. In the early 80’s while supply fell behind demand, this created higher college wage premiums in the UK and the US. However these were not matched by other countries crucially because of differences in the level of centralised wage setting and collective bargaining within countries and the change in the importance of these institutions and forms of wage setting that occurred. In Britain and the U.S the weakening of the unions and decentralisation let the market forces of supply and demand exacerbate the inequality in the wage distribution. But we also saw how it was the changing nature of product markets that also affected the nature of industrial relations within these countries in particular. The U.S system of wage setting was fundamentally market driven and in Britain the political will of the Conservatives, made Unionism weaker in the face of the changing nature of the product market.
