The Evolution of Inequality in Productivity and Wages: Panel Data Evidence

Abstract

There has been a remarkable increase in wage inequality in the US, UK and many other countries over the past three decades. A significant part of this appears to be within observable groups (such as age-gender-skill cells). A generally untested implication of many theories rationalizing the growth of within-group inequality is that firm-level productivity dispersion should also have increased. Since the relevant data do not exist in the US we utilize a UK longitudinal panel dataset covering the manufacturing and non-manufacturing sectors since the early 1980s. We find evidence that productivity inequality has increased. Existing studies have underestimated this increased dispersion because they use data from the manufacturing sector which has been in rapid decline. Most of the increase in individual wage inequality has occurred because of an increase in inequality between firms (and within industries). Increased productivity dispersion appears to be linked with new technologies as suggested by models such as Caselli (1999) and is not primarily due to an increase in transitory shocks, greater sorting or entry/exit dynamics.

ICT uses, innovation and SMEs productivity: Modeling direct and indirect effects in small local firms

“…In line with recent evidence, these two variables allow us to capture the relationship between the wage structure and firm productivity (Lallemand et al 2009;Faggio et al 2010;Mahy et al 2011). Regarding the use of wage as an indicator of productive physical capital in small local firms is important to make two points.…”

It’s Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States

“…Freeman and Kleiner ð2005Þ show how different wage-setting policies influenced the exit pattern of plants in the declining shoe industry. markets with inherent heterogeneity in workplace productivity ðsee, e.g., Melitz 2003; Klette and Kortum 2004;Faggio, Salvanes, and Van Reenen 2007;Haltiwanger, Lane, and Spletzer 2007;Andersson et al 2008;Bender et al 2008;Comin, Groshen, and Rabin 2009Þ due to differences in the introduction of new technology or other supply shocks or that face differential changes in product demand are likely to see productivity increases spilling over to wages through "rent-sharing" behavior. Efficiency wage models focused on the motivational impact of wages also suggest that wages and productivity are likely to increase or decrease together.…”

More similar firms — More similar regions? On the role of firm heterogeneity for agglomeration

“…Even though the expected productivity increases, the lowest possible productivity draw remains constant such that technological progress is reflected by a different shape of the distribution rather than by a different location. Empirical studies by Dunne, Foster, Haltiwanger, and Troske (2004) and by Faggio, Salvanes, and van Reenen (2010) provide evidence that technological progress is typically accompanied by an increase in the productivity dispersion. A theoretical argument for the positive correlation between average productivity and productivity dispersion could be made for example by assuming differences in the firm-specific adoption rates with regard to the use of new machines and technologies (see Caselli, 1999).…”