BANCA D’ITALIA
EUROSISTEMA
Trade and Wage Inequality, Mirage
or Reality?
Gian Maria Tomat
New Directions in Welfare 2011
6-8 July 2011, OECD, Paris
Contents
•
Description of movements of wage inequality during
1980-2000 period in EU15 area.
•
Main data source is the Luxembourg Income Study
(LIS).
•
Evidence reviewed in terms of international trade
theory.
Framework
•
•
•
Main framework is the Heckscher-Ohlin (HO)
model, with two factors of production: skilled labor
and unskilled labor (Bhagwati and Kosters, 1994).
In 2x2x2 HO model there exists one to one relation
between relative good prices and relative factor
prices (Stolper-Samuelson): trade increases wage
inequality in skilled labor abundant country.
The Stolper-Samuelson theorem can be reversed
in the “augmented” HO model, as a consequence
of economies of scale in differentiated product
industries (Helpman and Krugman, 1985).
Trade Facts
• EU15 Trade/GDP ratio increases from 53.2 to 70.7
per cent in 1980-2000 period.
• Intra EU15 merchandise trade is about 60 per cent
throughout 1990-2000 period.
• Share of commodity imports increases from 10.9 to
13.8 per cent for Asia and from 9.7 to 11.5 per cent
for Europe extra EU15.
• Share of commodity exports increases from 7 to 7.5
per cent for Asia and from 10.7 to 11.9 per cent for
Europe extra EU15.
Share of Commodity Imports by World Area
0.700
0.700
0.600
0.600
0.500
0.500
0.400
0.400
0.300
0.300
0.200
0.200
0.100
0.100
0.000
0.000
EU15
Other Europe
North America and Africa and Middle East
Oceania
1990
2000
Asia
Latin America
Share of Commodity Exports by World Area
0.700
0.700
0.600
0.600
0.500
0.500
0.400
0.400
0.300
0.300
0.200
0.200
0.100
0.100
0.000
0.000
EU15
Other Europe
North America and Africa and Middle East
Oceania
1990
2000
Asia
Latin America
The Data
• LIS, Income survey data for EU15 countries in
waves I-V, years 1980-2000.
• OECD, National accounts statistics for EU15
countries, years 1980-2000.
• Eurostat, Purchasing power parities (PPPs) for
EU15 countries, EKS PPPs for year 2000.
• Eurostat, Demographic statistics, years 1980-2000.
Definition of Income Measure
• LIS unit of analysis is the individual, income variable
is gross wage (excluding employer’s social security
contributions and taxes and including employee’s
social security contributions and taxes).
• Nominal values converted in constant 2000 prices,
using OECD household final consumption deflators,
for each EU15 country in sample in LIS waves I-V.
• Constant 2000 values in units of national currencies
converted in 2000 EKS EU15 prices, with Eurostat
EU15 EKS PPPs for year 2000.
Construction of EU15 Gross Wage Distribution
• Conversion of sampling weights of each country
survey to EU15 population weights in each LIS
wave I-V, with Eurostat demographic statistics.
• Sample restricted to male population in 25-54 age
range and not self employed, in order to obtain
comparable full-year, full-time equivalent
observations.
• Type I Winsorization, with bottom and top thresholds
equal to 1 per cent in the EU15 gross wage
distribution of each LIS wave I-V.
LIS Sample Population Shares
1980
1985
1990
1995
2000
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
0.152
0.220
0.040
0.023
0.158
0.014
0.014
0.154
0.217
0.040
0.023
0.158
0.027
0.014
0.014
0.218
0.041
0.023
0.157
0.027
0.014
0.014
0.220
0.042
0.024
0.156
0.021
0.027
0.014
0.014
0.218
0.029
0.010
0.042
0.107
0.024
0.156
EU15 sample
Restricted EU15 sample
0.594
0.040
0.620
0.231
0.495
0.324
0.497
0.341
0.663
0.507
Total EU15 Population
355'313'054
358'675'209
364'278'009
371'167'072
376'319'952
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
EU15 Average Gross Wages
C.I.
Mean
S.E.
Lower
Upper
Obs.
1980 25'381.3
168.4
25'051.4 25'711.3
13'146
1985 26'199.7
251.8
25'706.2 26'693.3
24'046
1990 30'959.8
416.8
30'142.9 31'776.8
22'174
1995 30'923.7
410.7
30'118.8 31'728.6
46'759
2000 31'304.5
260.6
30'793.7 31'815.4
41'507
EU15 Average Gross Wages
33'000
33'000
32'000
32'000
31'000
31'000
30'000
30'000
29'000
29'000
28'000
28'000
27'000
27'000
26'000
26'000
25'000
25'000
1980
1985
1990
1995
2000
Wage Inequality in Europe
• Wage inequality in year 2000 is greater than in year
1980 in the EU15 distribution: the 90/10 ratio
increases from 2.9 to 3.7.
• Inequality changes are determined by movements in
the EU15 distribution around the median: the 90/50
ratio increases from 1.7 to 1.9, the 50/10 ratio
increases from 1.7 to 2.
• Movements at the top of the EU15 distribution are
also important: the 95/50 ratio increases from 2 to
2.3, the 99/50 ratio increases from 2.9 to 3.7.
Inequality Indexes
Theil
Mean
Logarithmic
Deviation
90/10
90/50
50/10
0.091
(0.002)
0.092
(0.002)
0.095
(0.002)
2.936
(0.040)
1.694
(0.019)
1.733
(0.017)
0.044
0.047
0.087
0.094
0.088
0.095
0.091
0.099
2.858
3.014
1.658
1.731
1.699
1.766
0.262
(0.002)
0.057
(0.001)
0.115
(0.002)
0.114
(0.002)
0.122
(0.002)
3.398
(0.044)
1.794
(0.016)
1.894
(0.022)
0.252
0.276
0.258
0.267
0.055
0.059
0.110
0.119
0.110
0.118
0.117
0.126
3.311
3.485
1.764
1.825
1.851
1.936
1990
0.250
(0.014)
0.243
(0.004)
0.051
(0.002)
0.105
(0.004)
0.102
(0.003)
0.110
(0.005)
2.855
(0.057)
1.732
(0.017)
1.648
(0.028)
Lower
Upper
0.223
0.276
0.236
0.251
0.048
0.055
0.097
0.113
0.095
0.108
0.102
0.119
2.744
2.966
1.699
1.765
1.593
1.703
1995
0.265
(0.007)
0.256
(0.003)
0.055
(0.001)
0.113
(0.003)
0.110
(0.003)
0.119
(0.003)
3.205
(0.069)
1.782
(0.027)
1.799
(0.029)
Lower
Upper
0.250
0.280
0.250
0.262
0.053
0.058
0.107
0.118
0.105
0.115
0.114
0.125
3.070
3.340
1.729
1.835
1.742
1.856
2000
0.299
(0.005)
0.282
(0.002)
0.066
(0.001)
0.131
(0.002)
0.133
(0.002)
0.140
(0.002)
3.664
(0.051)
1.864
(0.017)
1.966
(0.022)
Lower
Upper
0.289
0.309
0.278
0.286
0.064
0.068
0.127
0.134
0.129
0.137
0.136
0.144
3.563
3.765
1.830
1.898
1.923
2.008
Variance
of Logarithm
Gini
A(0.5)
A(1)
1980
0.200
(0.005)
0.236
(0.002)
0.046
(0.001)
Lower
Upper
0.191
0.209
0.231
0.241
1985
0.264
(0.006)
Lower
Upper
Gini Coefficient
0.300
0.300
0.290
0.290
0.280
0.280
0.270
0.270
0.260
0.260
0.250
0.250
0.240
0.240
0.230
0.230
0.220
0.220
0.210
0.210
0.200
0.200
1980
1985
1990
1995
2000
Inequality Decompositions by Country
• Index decompositions by country show that between
component is lower than 20 per cent and within
component greater than 80 per cent in 1980-2000
period.
• According to Variance of Logarithm index the
between component declines from 17 per cent in
1980 to 8 per cent in 2000, the within component
increases from 83 to 92 per cent.
• For the Gini index the residual component increases
from 36.1 per cent in 1980 to 54.9 per cent in 2000.
Human Capital and Wage Inequality
• Skill level of a person defined along two dimensions:
education and experience.
• Education level defined according to ISCED-97
classification: (i) low – from pre-primary to lower
secondary, (ii) medium – from upper secondary to
post-secondary and (iii) high – university.
• Experience level defined according to age: (i) low –
25-34 years, (ii) medium – 35-44 years and (iii) high
– 45-54 years.
Education and Experience Wage Premiums
Education
Experience
Medium/ High/ Medium/ High/
Variance
Low
Medium
Low
Medium of Logarithm
1980
1.30
(0.02)
1.36
(0.04)
1.21
(0.02)
1.02
(0.03)
0.127
(0.006)
Lower
Upper
1.26
1.34
1.28
1.44
1.17
1.26
0.97
1.07
0.115
0.139
1985
1.21
(0.03)
1.33
(0.03)
1.27
(0.03)
1.01
(0.03)
0.225
(0.013)
Lower
Upper
1.15
1.26
1.27
1.39
1.21
1.34
0.96
1.07
0.201
0.250
1990
1.20
(0.03)
1.34
(0.03)
1.24
(0.03)
1.10
(0.03)
0.251
(0.018)
Lower
Upper
1.14
1.25
1.29
1.40
1.19
1.30
1.04
1.15
0.216
0.285
1995
1.07
(0.02)
1.41
(0.03)
1.21
(0.03)
1.10
(0.03)
0.272
(0.010)
Lower
Upper
1.03
1.10
1.35
1.46
1.16
1.27
1.05
1.15
0.252
0.293
2000
1.28
(0.02)
1.44
(0.02)
1.26
(0.02)
1.08
(0.02)
0.289
(0.006)
Lower
Upper
1.24
1.31
1.40
1.48
1.22
1.30
1.05
1.12
0.277
0.300
Inequality Decompositions by Skill Level
• Index decompositions by education level show that
between component is lower than 30 per cent and
within component greater than 70 per cent in 19802000 period.
• According to Variance of Logarithm index the
between component declines from 22.3 per cent in
1980 to 14.9 per cent in 2000, the within component
increases from 77.7 to 85.1 per cent.
• For the Gini index the residual component increases
from 18.2 per cent in 1980 to 23.8 per cent in 2000.
Wage Regressions
1980
1985
Medium
0.0373
(0.0342)
0.2249
(0.1047)
High
-0.0121
(0.1045)
0.2032
(0.1196)
(Age-25)
0.0144 *** 0.0520 ***
(0.0036)
(0.0149)
0.0227
(0.0152)
0.0269 *** 0.0252 ***
(0.0056)
(0.0052)
Medium*(Age-25)
0.0275 *** -0.0193
(0.0060)
(0.0165)
0.0142
(0.0183)
0.0119
(0.0083)
0.0070
(0.0060)
High*(Age-25)
0.0687 *** 0.0117
(0.0151)
(0.0180)
0.0224
(0.0173)
0.0116
(0.0127)
0.0485 ***
(0.0083)
(Age-25)2
-0.0004 *** -0.0016 ***
(0.0001)
(0.0005)
-0.0004
(0.0004)
-0.0006 *** -0.0005 ***
(0.0002)
(0.0002)
Medium*(Age-25)2
-0.0006 *** 0.0008
(0.0002)
(0.0006)
-0.0004
(0.0005)
-0.0003
(0.0003)
-0.0002
(0.0002)
High*(Age-25)2
-0.0016 *** 0.0002
(0.0005)
(0.0006)
-0.0003
(0.0005)
0.0001
(0.0004)
-0.0013 ***
(0.0003)
Constant
10.0521 *** 9.6163 ***
(0.0205)
(0.0995)
9.8092
(0.0985)
Country Effects
R2
Root MSE
Obs.
1990
1995
**
0.1069
(0.1206)
-0.0039
(0.0513)
*
0.2005
(0.1093)
*
***
0.2036
(0.0888)
2000
0.1127 ***
(0.0388)
**
0.1158
(0.0525)
**
9.8222 *** 9.5776 ***
(0.0387)
(0.0349)
-
1
4
5
9
0.3284
0.2932
1'874
0.2118
0.4217
6'223
0.2194
0.4425
14'516
0.2153
0.4622
43'557
0.2863
0.4540
32'591
Conclusions
• Increase in inequality in 1980-2000 period provides
motivation for further research, longer time span and
broader income concept are two important
extensions (Atkinson, Piketty and Saez, 2011).
• Interpretation of changes in wage and income
inequality over time requires also greater integration
between economic growth, trade and labor market
theories (OECD, 2011).
BANCA D’ITALIA
EUROSISTEMA