1. Stijn Broecke (OECD and IZA)
London Conference on Employer Engagement in Education and Training 2016
Skills and Inequality
Stijn Broecke (OECD and IZA)

2. The gap between rich and poor is at its highest for 30 years, with the top 10% now earning 9.6 times more than the poorest 10%

3. Economic cost of inequality
Earlier arguments: inequality = necessary evil in the pursuit of economic growth (Kaldor, 1957, Kuznets, 1955, Mirrlees, 1971; Lazear and Rosen, 1981)
More recently: inequality reduces growth:
Redistributive pressures (Persson and Tabellini, 1994; Alesina and Rodrik, 2014)
Generates social conflict (Benhabib and Rustichini, 1996; Perotti, 1996)
Prevents the talented poor from undertaking profitable investments in physical and human capital (Galor and Zeira, 1993; Banerjee and Newman, 1993)
Catalyses financial crises (Rajan, 2010)

4. Social costs of inequality
Lower social and inter-generational mobility (Krueger, 2012)
Health and social problems (Pickett et Wilkinson, 2011)
Higher crime (Fajnzylber et al., 2002)
Weaker social cohesion and trust (Brown et Uslaner, 2002)

5. Causes of inequality Globalisation Technological change
Regulations/institutions
Skills
Changing family structures
Non-wage incomes
Tax and benefit systems

6. Rich literature showing the link between inequality and changing skills needs
Skills-biased technological change: rising inequality linked to the fact that the supply of educated workers has not kept pace with the rise in demand for them (Juhn, Murphy and Pierce, 1993; Juhn, 1999; Goldin and Katz, 2008; Autor, 2014)
More recent theories of routine-biased technological change maintain a central role for skills in explaining rising wage inequality in the United States (Autor, Levy, and Murnane, 2003; Autor, Katz, and Kearney, 2006, 2008; Autor and Dorn, 2013; Autor, 2015)
Other explanations for changing demand for skills:
Offshoring (Blinder, 2009)
Population ageing (Dwyer, 2013)
Organisational changes (Acemoglu, 1999; Bresnahan et al., 2002; Caroli and van Reenen, 2001, Antràs et al., 2006)

7. But cross-country studies suggest skills matter little to inequality
Cross-country differences in wage inequality:
Paper
Data
Method
Do skills matter?
Devroye and Freeman (2001)
IALS
Variance decomposition No
Blau and Kahn (2005)
JMP decomposition
Leuven et al. (2004)
Katz and Murphy D&S analysis
Yes
Jovecic (2015)
PIAAC
Variance decomposition No
Pena (2015)
JMP decomposition
Paccagnella (2015)
Unconditional quantile regressions
Machin et al. (2016)
PIAAC 
No 

8. Survey of Adult Skills (PIAAC, 2012)
adults (aged 16-65) from 24 countries
Tested in literacy, numeracy and problem solving in technology-rich environments
Also: individuals’ skills use in the workplace, labor market status, wages, education, experience, and a range of demographic characteristics
Samples range from around in Sweden to nearly in Canada (5 100 in the UK)

9. Wage inequality varies across countries
Wage inequality in PIAAC countries (wage ratio D9/D1)

10. Countries differ also in the level and dispersion of skills
Mean numeracy, 10th and 90th percentile for the employed population

11. The relationship between skills inequality and wage inequality is not straightforward

12. Simulate wage distributions using reweighting techniques

13. The impact of skills inequality on wage inequality
Percentage change in wage inequality (P90/P10) as a result of moving to the average PIAAC skills inequality

14. Differences in return to skill are far more important
Percentage change in hourly wages
for a one standard deviation increase in numearcy

15. And the return to skill has a far more important impact on wage inequality
Percentage change in wage inequality (P90/P10) as a result of moving to the average PIAAC return to skill

16. The return to skill is determined in part by labour market institutions, policies and practices
Minimum wage
DiNardo et al., 1996 ; Lee, 1999 ; Wolff, 2008 ; Autor et al., ; Machin, 1997 ; Dickens et al., 1999; Koeniger et al., 2007
Collective bargaining coverage
Braconier et Ruiz-Valenzuea, 2014 ; Blau et Kahn, 1996 ; DiNardo et al., 2007 ; Wolff, 2008 ; Firpo et al., 2011
Employment protection legislation
OCDE (2015)
Practices around bonus pay
Lemieux et al., 2007
Size of the public sector
Generosity of unemployment benefits

17. The return to skill (and inequality) also depend on the supply of, and demand for, skill

18. Countries with a higher net supply of skills have lower wage inequality
Notes: BEL refers to Flanders; GBR to England and Nothern Ireland. For further information on definitions and data used, see source.
Source: OECD. "Skills and wage inequality." In: OECD Employment Outlook Paris: OECD Publishing, 2015.

19. Skills also explain wage gaps between various socio-economic groups
Raw
Skills
Return
A. Individuals whose parents have tertiary education/non-tertiary education wage ratio
B. Male/female wage ratio

20. Main conclusions for England/N.I.
The level of skills is relatively low
Skills inequality is relatively high
Reducing skills inequality will have a non-negligeable impact on wage inequality
High returns to skills are part of the explanation for higher wage inequality in the UK
This will partly be driven by labour market institutions (e.g. low collective bargaining coverage) but also by supply & demand for skills
High return should act as an incentive to invest in skills
Need to understand the barriers that are preventing the UK from moving to a higher skills equilibrium

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