Wage dispersion grows due to higher educational levels

The revelation that earnings distribution in Ireland in recent years has exhibited a very high degree of wage dispersion compared to other OECD countries, can largely be explained by the fact that more people have been returning to higher education, according to a study by the Dublin-based Economic and Social Research Institute, published in June 1997.

A new study by Dublin's Economic and Social Research Institute (ESRI) - "Earnings distribution and returns to education in Ireland, 1987-94", Alan Barrett, Tim Callen and Brian Nolan, ESRI Working Paper 85, June 1997- shows that there has been a higher degree of wage dispersion than might have been expected in Ireland, but that this may be largely explained by increased returns to higher education over the period of the study. Published in June 1997, the study also shows that by 1994, Ireland had one of the highest levels of low-paid workers in the OECD.

The data employed for the study comes from two large-scale household surveys, one carried out directly by ESRI, the other on its behalf. The first is the Survey of income distribution, poverty and usage of state services which the ESRI undertook in 1987; while the second is the 1994 Living in Ireland survey, a study by the European Community Household Panel (ECHP), carried out by Eurostat for the ESRI.

The findings

The 1987-1994 study notes that Ireland is a particularly interesting case in an international context, given its small open economy. It says that there has been a significant increase in the level of educational attainment of the Irish labour force in recent years and that the Irish labour market has also been characterised by highly centralised wage bargaining and by an improvement in the generosity of welfare benefits for unemployed people.

In an international context, the study notes that other OECD countries have not experienced the same degree of growth in earnings inequality, or in returns to education, that has occurred in the USA and in the UK. It says that these different experiences across different countries may be because of increases in the supply of skilled workers and institutional factors such as centralised wage bargaining. Given the relevance of these factors to the Irish labour market, the expectation had been that Ireland would have displayed a lower rate of inequality growth than elsewhere. As the study shows, however, this was not the case, with Ireland shown to have greater earnings inequality than even the USA, which is generally the outlier in this context.

Participation in third-level education has expanded more rapidly in Ireland than in most other EU countries in the past decade. This enhancement in the level of educational attainment among those entering the labour force in the 1980s and 1990s, together with the exit from the labour force of older age groups with much lower levels of attainment, is reflected in the relatively rapid change observed in the educational profile of employees between 1987 and 1994.

Taken together, the report says, the combination of the change in the age-education profile of employees and higher returns to education account for much of the observed increase in wage dispersion. This returns-to-education effect appears, in particular, to demonstrate the strength of the growth in demand for skilled labour.

Meanwhile, applying OECD criteria to the Irish data, the study says that 21% of Irish employees were low paid in 1987, a percentage that rose to 24% by 1994. The definition of low-paid workers as full-time workers who earn less than two-thirds of the median weekly earnings is taken from a 1996 OECD study. On this basis, Ireland in 1994 had one of the highest levels of low paid workers in the OECD. The only country with a higher percentage of employees below the OECD benchmark was the USA, with 25%.

Commentary

A combination of higher educational attainments by a relatively young workforce and Ireland's booming economy over the past decade or so, has enhanced the pay prospects of higher-skilled entrants into the labour market

It could be argued that institutional factors such as centralised wage bargaining should have helped to reduce growth in earnings inequality, as it has done in some countries. In Ireland, however, where centralised wage bargaining has been in place since 1987, the study shows that the opposite appears to have occurred.

Perhaps this is best explained, however, not by any failure of centralised bargaining per se in regard to wage equity, but more likely by reference to a combination of consistently high levels of economic growth over much of the period (1987-94) and the fact that better educated cohorts of workers have been replacing older, less educated, groups. (Brian Sheehan, IRN, and John Geary, UCD)