Thursday, July 29, 2010

The Matthew principle in practice?



The Matthew principle in practice? –

On the development of wage dispersion in Norway and the relation to changes in the profitability distribution of firms

Harald Dale-Olsen
Kjersti Misje Nilsen
Institute for Social Research
Oslo, Norway
April, 2009


Key words: wage and earnings dispersion, variance decomposition, human capital, profitability,
JEL-code: J31, J33, M52

Acknowledgement: This work was financed by the Norwegian Ministry of Work and Inclusion under the project
“Lederlønninger og andre topplønninger i det norske arbeidsmarkedet”, and by the Norwegian Research Council
under grant number 173591/S20 (Harald Dale-Olsen) and under grant number 187928/S20 (Kjersti Misje
Nilsen).Corresponding author: Harald Dale-Olsen, Institute for Social Research, P.O. Box 3233 Elisenberg, N-0208

In this paper we use comprehensive population-wide Norwegian linked employer-employee data
to study the development of wage dispersion during the period 1995 to 2006. The dispersion in
both for yearly earnings and hourly wages in the Norwegian economy during this period have
increased steadily, but less for hourly wages than for yearly earnings. For yearly earnings we
identify a movement towards greater dispersion between workplaces and smaller dispersion
within workplaces. For hourly wages these changes are less evident. First-differenced GMMregressions of wage dispersion on profitability reveal that those well-off benefit more from increased firm profitability than the median worker.

Key words: wage dispersion, variance decomposition, human capital, profitability, GMM
JEL-code: J31, J33, M52

1. Introduction
Changes in the wage and earnings distributions are important for several reasons. Such changes provide evidence on growth in the demand for skills, on changes in wage setting institutions and social norms, and on changes in the distribution of economic welfare and thus on a wide range of health and social issues.1

In Anglo-American countries we have observed a strong but possibly diminishing
increase in wage and earnings inequality during the last 20 years (Katz and Murphy, 1992; Levy and Murnane, 1992; Acemoglu, 2002). Several studies indicate that the U.S. and UK labour market has been polarising (e.g., Autor et al., 2006; Goldin and Katz, 2007; Goos and Manning, 2007). Goldin and Katz argue for example that the U.S. wage structure has been polarising since the late 1980s. In Europe outside the UK, the evidence is clearly mixed. In many countries one only observes small variation in the overall wage and earnings inequality. In other countries one finds evidence of increased inequality (Freeman and Katz, 1995; Atkinson, 2008; Lazear and Shaw, 2009). In some cases, conflicting evidence is found due to different empirical approach and due to mixed effect over time. For example, while Germany is usually associated with a stable wage structure, Schönberg et al. (2009) conclude that German wage inequality increased at the top of the distribution in the 80s and at the bottom end of the distribution from the 90s.

Similarly, the comparative analysis of Atkinson (2008) which focuses on four periods – the 1970s,
the 1980s, 1990s and the 2000s – reveal different trends for many countries over the four

The big question is why do we observe these country differences and similarities when it
comes to changes in the wage structure? One explanation for the similarity regarding inequality growth is that skill-biased technological change increase demand for all kinds of skills and thus the return to skills (Acemoglu, 2002). Therefore technological change could be the main force 

1 See Katz and Autor (1999) for a survey on wage inequality. For a recent survey of the literature on wage inequality,
see Lemieux (2008). For a popularised discussion of inequality in general and the consequences for societies, we recommend the recently published and much debated book of Wilkinson and Pickett (2009).



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