‘Have earnings polarised in the UK? Craig Holmes Pembroke College, Oxford University and SKOPE ISER, University of Essex, October 21 st 2013

Outline Background on the hourglass labour market Polarisation and earnings distributions – some theory Methodology – earnings distribution decomposition Data Decomposition results Discussion and future work

Background Routinisation hypothesis (Autor, Levy and Murnane, 2003): – Refinement of SBTC - technology related to tasks, not skills – Routine tasks substitutable for computer capital – Growth in non-routine jobs, decline in routine jobs Polarization hypothesis (Goos and Manning, 2007) – Routine occupations found in middle of income distribution – Non-routine occupations found at top and bottom of distribution – Ranking of jobs based on initial wages

Background Goos and Manning (2007) – :

Background Similar results observed in: – US (Autor, Katz and Kearney, 2006; Caranci and Jones, 2011) – Germany (Spitz-Oener, 2006; Oesch and Rodríguez Menés, 2011) – Spain and Switzerland (Oesch and Rodríguez Menés, 2011) – Across Europe (Goos, Manning and Salomons, 2009) Other explanations have been put forward: – Offshoring – Growing wage inequality and demand for services

Background Wage inequality in the UK has risen since the 1980s

Background Earnings growth by percentile, UK

Background More high-wage and low-wage jobs  More inequality Year Jobs earning below 2/3 * median hourly wage Jobs earning above 1.5* median hourly wage Initial (1987)20.2%23.4% Final (2001)23.0%25.6% Initial (1994) 22.6%25.2% Final (2007) 21.3%25.9%

Background Two main research questions: – To what extent has the shift towards non-routine employment decreased the number of middle wage jobs / increased wage inequality – Why, given that, has earnings distribution polarisation halted since mid 1990s?

Polarisation and earnings distributions The shift away from routine work should increase the number of high-wage and low-wage jobs, everything else being equal

Polarisation and earnings distributions However, wage structure of occupations unlikely to remain constant Autor, Katz and Kearney (2006) – relative wage of routine occupations falls – “Wage polarisation” – a US phenomenon? Wage differences between different non-routine occupations (Williams, 2012) – Other compositional changes – more educated workforce, lower union membership, greater female participation – Non-uniform increase in demand for non-routine tasks? – Change in returns to other characteristics

Methodology Standard quantile regressions compute quantiles of a distribution conditional on explanatory variables However, we need to decompose unconditional distributions Firpo, Fortin and Lemieux (2009) – two stage approach 1.Estimate a counterfactual distribution via reweighting initial distribution 2.Use re-centered influence functions to estimate distributional statistics (such as percentiles) as a linear expression of main explanatory variables

Methodology Data: – N observations, N 0 from initial distribution, N 1 from final distribution – T i = 1 if from final distribution, i = 1,...,N. Pr(T i ) = p Data can be reweighted Reweighting: – where p(X) = Pr (T=1|X)

Methodology This counterfactual can be used to decompose wage and composition effects of a distributional statistic: An recentered influence function of v(F) measures its sensitivity to each observation, where E(RIF) = v(F) – Assume a linear projection of RIF onto X: – where j = {0, C, 1}

A quantile regression approach Hence: This is a more general case of the Blinder-Oaxaca decomposition, where v(F) is the mean.

Data Family Expenditure Survey, – Around 10,000 observations each year – Usual gross pay and usual hours of work – Education – year left FT education  four levels – Union membership – subscription fees>0 Quarterly Labour Force Survey, – Around 150,000 observations each quarter (5 quarter membership) – Gross hourly pay directly reported – Educational qualifications – Union membership directly reported

Data Female47.3%50.3%50.7%52.1% Union membership29.0%15.3%36.9%31.5% Works part-time23.6%23.3%26.3%26.6% University graduates9.4%16.9%13.4%23.4% No qualifications36.1%18.6%17.2%8.3% Experience < 5 years11.9%9.4%7.7%8.2% Experience > 20 years49.1%53.5%57.8%53.8% Professional11.2%12.8% 11.9%14.4% Managerial7.3%11.7% 12.5%14.9% Intermediate10.1%13.7% 14.0%15.8% Manual Routine36.1%26.4% 26.9%19.9% 12.2% Admin Routine19.7%15.2% 14.7% Manual Non-routine1.8%0.8% 0.9%1.1% Service13.8%19.4% 17.9%21.7% N

Composition and wage effects FES, :

Composition and wage effects LFS :

Composition and wage effects Both periods find compositional changes decreasing the number of middle-wage jobs Wage structure changes reverse this – partially in the 1987 and 2001, and completely between 1994 and 2007 Year Jobs earning below 2/3 * median hourly wage Jobs earning above 1.5* median hourly wage Initial (1987)20.2%23.4% Composition effects only24.0%27.1% Final (2001)23.0%25.6% Initial (1994) 22.6%25.2% Composition effects only 25.2%27.3% Final (2007) 21.3%25.9%

Individual composition effects

Individual composition effects

The wage structure - aggregate

The wage structure - occupations

The wage structure - education

Discussion Wage structure reduces increase in inequality, despite change in composition on the workforce However, hard to interpret as educational or occupational opportunities pulling the middle up – despite the “room at the top” mindset of policymakers An alternative interpretation – downward sloping wage structure is a ‘correction’ of compositional changes – not as many people in high wage jobs as we’d predict

Discussion Minimum wage has clearly having an effect at low-end However, other wage structure effects also helping to reduce lower-tail inequality e.g. male-female wage gaps, relative pay of service jobs

Discussion Increasingly heterogeneous occupational groups

Discussion Unrelated to educational attainment? Graduates only:

Discussion This could reflect a supply problem if it reflects quality of graduates Could also reflect suitability of university route into labour market vs. vocational education Can not ignore changes on the demand side – in particular, are technology and skilled labour always complements? Brown, Lauder and Ashton (2011): – “Knowledge work”  “Working knowledge” – “Digital Taylorism” – deskilling of high skill work – “War for Talent” – high premium paid for small pool of graduates at top universities

Discussion So far, defined high wage job as a fixed multiple of median pay However, the size of the wage spectrum is relevant Very high pay is increasing, even while high pay remains constant Some higher paid workers move closer in relative terms to the middle as the top experience very rapid wage growth What is an appropriate cut-off for these groups?

Conclusion Main points: – Earnings distributions polarised during 1980s and 1990s – This polarisation was less than compositional shifts would have predicted – Middle paying jobs stop declining in middle of 1990s, despite continuation of compositional shifts Areas for future investigation: – Educational attainment and occupational demands do not seem to be offering opportunities to narrow earnings inequality – What happens to occupational mobility, particularly at low end? – What has happened since 2007?

Contact Details Craig Holmes Pembroke College, Oxford, and ESRC Centre on Skills, Knowledge and Organisational Performance (SKOPE),