Earnings disparities in Europe

The Structure of Earnings Survey provides harmonised data on individual earnings across Europe, identifying pay gaps by country and sector. It also highlights earnings disparities due to company-related and individual factors. The issue of earnings inequality is fundamental to quality of work and employment; the earnings survey, therefore, contributes to a greater understanding of some of the key elements of the Lisbon strategy.

The Employment in Europe 2005 report analyses earnings disparities and determinants of earnings distribution in the EU (2.6Mb PDF). The data are taken from Eurostat’s Structure of Earnings Survey (SES), an enterprise-based survey that looks at several levels of earnings inequalities in the private sector; it does not cover the public sector. The most recent data are from 2002.

The SES includes questions about the enterprise and the individual employee, and provides an overview of the various levels of earnings disparities, including the national, sectoral, occupational and individual dimension. The survey provides detailed statistics on gross hourly, monthly and annual earnings of women and men, which can be analysed in relation to the personal and job characteristics of both full-time and part-time employees.

Structure of earnings

Among the key findings of the survey are the following:

  • Overall, there is no sign of an increase in earnings inequality in Europe in recent decades. However, during the 1990s, Denmark, Poland and the UK revealed an increase in earnings inequality. In the new Member States (NMS), the traditionally low earnings inequality increased and is now close to or has even exceeded the disparities in the EU15.
  • There are wide earnings disparities between the EU15 and the eight NMS of central and eastern Europe (i.e. the NMS excluding Cyprus and Malta); in these eight countries, average annual earnings were two to four times lower than in the EU15.
  • Across the 25 EU Member States (EU25), services continued to be slightly better paid than industry. Financial intermediation was the highest paying activity, and hotels and restaurants the lowest.
  • Companies that introduce new methods of work organisation leading to more flexible practices tend to have a wider range of salaries than others.
  • Key determinants of earnings are skills and occupations. Being a high-skilled worker generates a high earnings premium. Thus, the financial returns to education are unambiguously positive.
  • The persistent gender pay inequality is reflected in a gap of slightly over 17% of earnings between male and female employees. The gender earnings gap ranged between 14% in Norway and 32% in Estonia.
  • Workers with a fixed-term or part-time contract on average earn less.
  • Length of service has a positive effect on earnings.
  • Bonuses amount to, on average, 8.4% of annual earnings in the EU25.

Determinants of earnings inequality

The report provides results of an empirical analysis of determinants of earnings inequality based on a regression analysis. This method helps to disentangle the sources of inequality and to identify the contribution of various factors to earnings disparities, such as educational attainment, sex, occupation and activities, sector or size of enterprise.

Differences in educational attainment are the single most important observable characteristic and account for one third of explained variations in earnings. The second most important factor contributing to earnings inequality is inter-sectoral wage differentials. Sex is the third highest determinant, but has a relatively small impact. All other factors are secondary or insignificant.

Further research reveals the impact of various variables on earnings:

  • The gender variable causes 22% of relative differences.
  • Working part time leads to a 10% negative difference, compared with working full time.
  • Being a non-manual worker implies a 23% positive difference.
  • Working in a large enterprise (with more than 250 employees) makes an 18% difference.
  • Being a low- or medium-skilled worker reduces earnings by between 32% and 45%.

The analysis further divided women and men into different sub-samples and investigated the differing effects of various factors on individual earnings of both sexes. Working in a larger company seems to positively impact on men’s earnings to a greater extent than women’s. In addition, being a non-manual worker yields higher rewards for men, as does working in industrial sectors. Age has a positive impact for both sexes but has a greater positive effect on earnings for men than for women.

Earnings disparities and the Lisbon strategy

The SES provides an EU-wide harmonised coverage of earnings data and contributes to the understanding of some key elements of the renewed Lisbon strategy, such as increased wage differentials and remaining pay gaps, particularly the persistent pay inequalities between women and men. The survey indicates that collective bargaining coverage appears to have a great impact on earnings inequality. However, as the relevant questions were optional, an analysis of the impact of collective agreements is only possible for selected Member States.

The Employment in Europe report emphasises that the issue of earnings inequality is fundamentally linked to employment and the creation of'more and better jobs'in the EU, relating especially to the'better jobs'part of the objectives. The Integrated Guidelines for growth and jobs (60Kb PDF) deal essentially with wage determination and developments.

A general conclusion of the Employment in Europe 2005 report is that there is no clear-cut relationship between the level and dynamics of earnings inequalities, on the one side, and labour market and economic performance, on the other. The Scandinavian countries, for example, are characterised by the lowest degree of earnings inequality and by good economic and labour market performance.

Anni Weiler, AWWW GmbH ArbeitsWelt - Working World

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