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Why has the relative pay of more qualified workers risen more strongly in the UK and the US than in other advanced economies during the past two decades?

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Introduction

Why has the relative pay of more qualified workers risen more strongly in the UK and the US than in other advanced economies during the past two decades? During the 1980's and continuing in the 90's, the US and the UK had exceptional increases in earnings inequality and in wage differentials by skill category. The rise in inequality in the US was associated with large declines in real wages for low-paid workers. Most other developed countries had moderate increases or in some cases effectively no rise in wage inequality. So how do we explain the different paths of the U.S. and the U.K.? The key forces behind the rise in inequality appear to be the demand for and supply of skills i.e. a secular shift in relative labour demand favouring more educated workers and workers with problem solving skills compared to a slowdown in the growth rate of the supply of highly educated workers relative to less educated workers. The role of labour institutions is also a very important component of the explanation and the move to decentralisation of bargaining in the UK and the decline in Trade Unionism in the US are key factors that we will explore. Let us first look at the empirical findings for the US and UK, compared to the rest of the advanced economies. IN the US, from the late 70's to the early 90's wage dispersion increased dramatically for both men and women. ...read more.

Middle

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). ...read more.

Conclusion

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. ...read more.

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