Slight decrease in wage inequality

More women are working in Spain today than in previous years and more workers have university degrees. Furthermore, people are staying in the same job for shorter periods. In general, it could be expected that these changes in the labour force would have increased wage variations and inequalities. However, despite all these changes, research from the Spanish Central Bank reveals that wage inequality in Spain has decreased slightly between 1995 and 2002, due mainly to changes in wage structure. Reduced investment returns to education and age partly explain this decrease in wage inequality.

The Spanish Central Bank (Banco de España) has recently published a research study entitled Wage inequality in Spain: Recent developments (1Mb PDF), aimed at analysing wage inequality between 1995 and 2002, and the significance of the different factors underlying this form of inequality in Spain.

During this period, several changes have affected wage distribution. For example, the Spanish labour market has experienced changes in the composition of the labour force, mainly an increase in the participation of women and workers with a university degree in comparison to other groups. Furthermore, in this period, several labour market reforms have brought about transformations in the institutional setting of the labour market, affecting the average number of years’ service in the job or length of tenure. The report explains how these diverse changes – when combined and in isolation – have affected wage inequality in the period analysed.

From a methodological perspective, the research has referred to data from the Wage Structure Survey (Encuesta de Estructura Salarial), developed by the Spanish National Institute of Statistics (Instituto Nacional de Estadística, INE).

Changes in labour force composition

The research suggests that the Spanish labour force was more heterogeneous in 2002 than in 1995, especially in the higher occupational categories. Thus, significant variations have emerged in the composition of the labour force. In particular, women and university graduates have increased their relative proportion in the working population between 1995 and 2002. Moreover, several labour market reforms have been implemented in order to reduce costs of recruitment and redundancy, thus affecting job tenure levels. It could be argued that these changes in the composition of the labour force should have affected wage inequality.

More women at work

An in-depth analysis on the effect on wage inequality of each of these changes taken in isolation reveals some interesting results. First, available data show that the proportion of female workers within the labour force has increased by 7% between 1995 and 2002. This situation has given rise to two contradictory situations. On the one hand, the average wage level is lower for women than for men, thus implying that an increase in female participation should increase inequality in this regard. On the other hand, women’s wages vary to a lesser degree than men’s wages do; therefore, a higher female participation rate in the labour market should reduce overall wage inequality. Consequently, the changes in female participation have almost no impact on the overall dispersion of wages, as both effects compensate each other.

More university graduates

Secondly, the proportion of university graduates has increased by 4% between 1995 and 2002. According to the research, this situation has a clear effect on inequality, in the sense that the average graduate wage is much higher than the average wage for the overall population. Moreover, university graduates represent the most heterogeneous group in terms of wage inequality within their ranks. Therefore, these two effects should cause increased inequality.

Shorter job tenure

Finally, in relation to changes in job tenure, the available data show that the proportion of workers with less than three years of work experience in the same company has increased substantially during the period analysed, while the group of workers with more than seven years of experience has declined more than any of the other groups. Since the groups that are gaining a greater proportion of the labour force have lower wages than individuals with more experience have, this factor in isolation should have resulted in increased wage inequality.

Slight reduction in wage inequality

Therefore, most of the abovementioned changes in the composition of the labour force should have resulted in higher wage dispersion. However, based on information from the Wage Structure Survey, the research reveals instead that wage inequality has actually decreased between 1995 and 2002, although the reduction has not been substantial. The inequality has decreased at the bottom and the middle part of the labour force distribution – especially in the latter segment – whereas it has slightly increased among the higher occupational groups.

Lower returns to education and age

The research shows that an important explanatory factor for this lower wage variation is the significant decrease in the investment returns to education in the 1995–2002 period. This situation, which has been observed in the Spanish economy since the 1980s, is explained by the fact that the substantial increase in the supply of university graduates has not been offset by similar increases in demand. According to the study’s authors, this result clearly contrasts with the available empirical evidence for other countries, where there has been an increase in the wage premium for university graduates in recent years.

At the same time, the wage variation between workers of different ages has decreased during the 1995–2002 period, due mainly to the increase in the educational quality of young workers.

Thus, the research finds that, in many dimensions, the more restricted wage dispersion has offset the increase in wage inequality derived from the changes in the composition of the labour force. Consequently, it is suggested that the changes in wage structure ultimately override the potential effect of changes in the composition of the labour force.

Iñigo Isusi, IKEI