## _wp07169

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---

### Introduction — focus and context
- Concern: globalization's impact on employment and distribution of incomes in industrialized countries.
- Observations:
  - Globalization generally had a positive impact on global economic growth.
  - Debate centers on whether globalization increased income inequality and whether protectionist measures have been urged in response.
  - Export sectors in Europe performed well despite these concerns.
- Cross-country outcome heterogeneity:
  - Income inequality increased in many advanced economies over the past two decades, but in some continental European countries inequality rose only modestly or declined.
  - United Kingdom and United States experienced much larger increases in inequality.
  - Gini coefficient example: United Kingdom net disposable household income Gini rose from 27 in the late 1970s to 34 in the late 1990s (an increase of almost 30 percent).

### Stylized drivers of inequality
- Changes Affecting Labor Supply:
  - Examples: immigration, trends in education, female labor market participation, rise of part-time labor, government transfers.
- Changes Affecting Labor Demand:
  - Examples: technological (skill-biased) change, increased international trade, outsourcing.
- Changes in Labor Market Institutions:
  - Examples: changes in minimum wages and the degree of unionization, tax law changes, deregulation.

### Empirical approach used in the paper
- Focused data sample to isolate economic drivers (technology and globalization) and to enhance comparability:
  - Sample restricted to hourly wage income of male household heads, aged 18 to 64, employed full time and worked at least 48 weeks per year.
  - Data source: Luxembourg Income Study (LIS).
  - LIS note: database contains information for some 25 advanced countries for one or more years; for most countries, data are available only up to 2000.

### The Facts — key empirical findings and statistics
- Median real hourly wages of prime-age males:
  - United Kingdom: median wage increased by 30 percent from 1979 to 2000.
  - West Germany (1981-2000): median wage increased by about 14 percent.
  - United States (1979-2000): median wage increased by about 5 percent.
  - Median hourly wage for prime-age males was roughly 16 U.S. dollars in these countries in 2000 (converted at PPP exchange rates).
- Bernanke reference:
  - Median hourly wage of full-time workers rose by about 11.5 percent between 1979 and 2006 (mentioned in source).
- Relationship between labor share and income inequality:
  - Plotting changes in labor shares against changes in the Gini coefficient for net disposable income does not suggest an obvious relationship.
  - Correlation coefficient reported in the sample: 0.3.
- Wage inequality patterns:
  - Wage inequality increased in virtually all countries for which data were available.
  - Wage inequality increased significantly more in Denmark and the United States than income inequality.
  - Income inequality grew much stronger in Belgium than wage inequality.
- Dynamics across countries and over time (selected country notes):
  - Germany (West): wage distribution relatively stable during the 1980s; inequality grew sharply in the late 1990s in the lower half.
  - Denmark: inequality grew mostly in the lower half during the 1990s.
  - Belgium, France, Italy, Netherlands: wage distributions relatively stable.
  - United Kingdom: sharp increase in inequality across all wage groups until mid-1990s and modest rise at the top since then.
  - United States: largest increase in wage inequality in the early 1980s; further increase in the 1990s mainly in the upper half of the distribution.
- Polarization (hollowing out of the middle):
  - Observed in the United States and the United Kingdom, and to some extent in Sweden, as shown by shifts in relative wage distributions (wages deflated with median wages; percentile cutoffs held constant by base year).

### Quantitative wage-dispersion measures (selected entries from Table 1 — Log percentile differentials for male hourly wages)
- Log 90th-10th Hourly Wage Differential (selected country series):
  - United States: Early 1980s 1.16; Mid 1980s 1.40; Early 1990s 1.33; Mid 1990s 1.39; Early 2000s 1.43.
  - United Kingdom: Early 1980s 0.72; Mid 1980s 1.08; Early 1990s 1.10; Mid 1990s 1.18; Early 2000s 1.22.
  - Denmark: Early 1980s -0.86; Mid 1980s 0.92; Early 1990s 0.99; Mid 1990s 1.03.
  - France: Early 1980s 0.97; Mid 1980s 1.05; Early 1990s 1.08; Mid 1990s 1.02; Early 2000s 1.00.
- Log 90th-50th Hourly Wage Differential (selected entries):
  - United States: Early 1980s 0.56; Mid 1980s 0.66; Early 1990s 0.60; Mid 1990s 0.68; Early 2000s 0.73.
  - United Kingdom: Early 1980s 0.30; Mid 1980s 0.59; Early 1990s 0.59; Mid 1990s 0.64; Early 2000s 0.67.
- Log 50th-10th Hourly Wage Differential (selected entries):
  - United States: Early 1980s 0.60; Mid 1980s 0.74; Early 1990s 0.73; Mid 1990s 0.71; Early 2000s 0.70.
  - United Kingdom: Early 1980s 0.42; Mid 1980s 0.49; Early 1990s 0.51; Mid 1990s 0.55; Early 2000s 0.55.
- Data notes:
  - Data for Denmark and Sweden are based on annual wages; for Belgium, France, and Italy on net wages.

### Analysis — interpretation and competing hypotheses
- Measurement and interpretation caveats:
  - Poor measurement of income other than wage income (capital gains, interest, dividends, profits) may obscure relationships between labor share and income inequality.
  - Labor share measurement issues: when computed on the basis of value added at market prices, indirect taxes less subsidies are a wedge; a fall in labor's share could be associated with a rise in the share of indirect taxes less subsidies rather than capital.
  - A decline in the labor share is not necessarily a fall in real wages; it can occur if real wages rise but fail to keep up with average labor productivity.
  - Bentolila and Saint-Paul (2003) show the correlation between changes in wages and changes in the labor share is relatively weak for a sample of 12 OECD countries.
- Explanatory roles considered:
  - Skill-biased technological change, globalization, and between-industry shifts in labor demand have been emphasized in the literature (particularly for the United States).
  - Alternative explanations include declining real minimum wages (Card and DiNardo (2002), Lemieux (2006)) and changes in labor force composition (rising education and experience).
  - Country-specific events and policies may be more important than global trends in explaining cross-country differences.
  - Labor market institutions (wage compression, minimum wages, unionization) may have played an important role in limiting or shaping inequality changes in Europe; however, evidence and theory provide mixed implications (e.g., Acemoglu (2003) model vs. observed stability in upper parts of distributions).
  - The timing mismatch between acceleration in technology/globalization in the 1990s and a slowdown in inequality growth raises doubts about attributing inequality changes solely to globalization or technology.

### Implications emphasized in the source text
- Summary measures (e.g., Gini coefficient) may miss where in the distribution changes occur; detailed percentile and distributional analysis is necessary to discriminate among hypotheses.
- Country- and period-specific patterns matter: policy and institutional factors should be examined alongside global economic forces when assessing drivers of wage and income inequality.

### Box 1. Rising Wage Inequality in the United States — Key points
- Overview and historical context:
  - Distribution of earnings and incomes in the United States remained remarkably stable from the 1940s to the 1970s.
  - A marked acceleration in the growth of earnings inequality began in the late 1970s and was documented in the early 1990s.
  - The college wage premium expanded dramatically in the 1980s, after having fallen in the 1970s.
- Early consensus: skill-biased change and industry shifts:
  - Early literature concluded that skill-biased technological change and between-industry shifts in labor demand were central drivers.
  - Katz and Murphy (1992) noted rising wage inequality within groups defined by education and experience since the early 1970s.
- Trade, prices, and globalization debates:
  - Factor content models predicted a small impact of trade on wages in advanced countries because imports of manufactured goods from developed countries amounted to less than 2 percent of the combined GDP of the OECD in the 1980s.
  - Leamer (1996) argued prices rather than quantities mattered: liberalizations in Asia, Eastern Europe, and Latin America affected labor markets through declines in prices of labor-intensive tradables.
  - Krugman (2000) contested Leamer’s view, showing prices and wages were predominantly determined by developments in the large country (i.e., the OECD) in a two-country general equilibrium model.
- Technology, job tasks, and polarization:
  - Autor, Katz and Kearney (2005) conclusions:
    - Much of the rise in U.S. earnings inequality during the 1980s appears explained by shifts in labor supply and demand for skills combined with erosion of labor market institutions.
    - The surge of inequality in the 1980s reflected a secular rise in the demand for skill, possibly linked to the computer revolution and other technological advances.
  - Autor, Katz and Kearney (2006) conclude that changing job task demands, spurred by information technology and its impact on outsourcing, helps interpret recent polarization of the wage structure in the U.S.
- Revisionist critiques: non-market factors and episodic explanations:
  - Card and DiNardo (2002) argue the rise in inequality during the 1980s is largely explained by the declining real value of the minimum wage and characterize the growth in U.S. earnings inequality as primarily a one-time event of the early 1980s.
  - Lemieux (2006) argues the fall in the minimum wage explains most of the surge in inequality in the 1980s but finds changing labor force composition during the 1990s (rising education and experience) contributed to further inequality.
- Cross-country labor market reforms and divergent outcomes:
  - Many European countries substantially reformed labor markets and institutions over recent decades, which may explain differences in wage inequality trends.
  - Annett (2006) studies Denmark, Ireland, the Netherlands, and the United Kingdom — countries that undertook major reforms and stand out in terms of success in reducing unemployment:
    - Ireland and the Netherlands centered reforms on consensus-based agreements between social partners, trading wage moderation for labor tax cuts.
    - The United Kingdom weakened the power of unions.
    - Denmark concentrated on benefits reform: continued generous benefit levels with lower duration, tougher conditionality, and stricter activation requirements.
  - Observed outcomes noted:
    - The United Kingdom experienced a sharp increase in inequality.
    - Wage inequality remained relatively stable in the Netherlands and increased only slightly in Denmark.
    - Income inequality actually fell in both the Netherlands and Denmark.
    - Income inequality has also remained stable in Ireland from 1987 to 2000. Wage data are only available starting in 1994.
- Conclusion (IV):
  - Evolution of income and wage inequality is a complex phenomenon driven by many factors that played different roles across countries.
  - Developments differed appreciably across advanced economies: changes occurred at different times and in different parts of the wage distribution.
  - Labor markets in the United States and the United Kingdom witnessed some polarization.
  - Wage distributions in euro-area countries have not followed any common trend and have remained relatively stable in several countries.
  - No consensus exists on why inequality increased in some industrialized countries but not others: competing explanations include skill-biased technological change and changing job task demands versus changes in labor market institutions (minimum wages and degree of unionization).

### Data appendix: sample and data sources (Box 1)
- Data source: Luxembourg Income Study (LIS), which harmonizes and standardizes micro-data from national household surveys to facilitate comparative research.
- Access note: The datasets can be accessed via the internet mailing system by submitting SAS, SPSS or STATA programs. http://www.lisproject.org/
- Sample restrictions used in the analysis:
  - Wage income of male household heads, aged 18 to 64.
  - Worked at least 48 weeks per year and more than 35 hours per week.
  - Observations with the lowest 1 percent earnings are excluded.
  - Observations with an income above ten times the median wage are excluded.
- More detailed information on data sources and definitions can be found on the LIS website.

*Source: _wp07169 (excerpts provided). This overlay summarizes the paper's Introduction, data approach, empirical findings, quantitative indicators from Table 1, interpretive discussion, and Box 1 as presented in the source content.*

### References..............................................................................................................

### _wp07169 - References

### Introduction — focus and context
- Concern: globalization's impact on employment and distribution of incomes in industrialized countries.
- Observations:
  - Globalization generally had a positive impact on global economic growth.
  - Debate centers on whether globalization increased income inequality and whether protectionist measures have been urged in response.
  - Export sectors in Europe performed well despite these concerns.
- Cross-country outcome heterogeneity:
  - Income inequality increased in many advanced economies over the past two decades, but in some continental European countries inequality rose only modestly or declined.
  - United Kingdom and United States experienced much larger increases in inequality.
  - Gini coefficient example: United Kingdom net disposable household income Gini rose from 27 in the late 1970s to 34 in the late 1990s (an increase of almost 30 percent).

### Stylized drivers of inequality (as listed in the source)
- Changes Affecting Labor Supply
  - Examples: immigration, trends in education, female labor market participation, rise of part-time labor, government transfers.
- Changes Affecting Labor Demand
  - Examples: technological (skill-biased) change, increased international trade, outsourcing.
- Changes in Labor Market Institutions
  - Examples: changes in minimum wages and the degree of unionization, tax law changes, deregulation.

### Empirical approach used in the paper
- Focused data sample to isolate economic drivers (technology and globalization) and to enhance comparability:
  - Hourly wage income of male household heads, aged 18 to 64, employed full time and worked at least 48 weeks per year.
  - Data source: Luxembourg Income Study (LIS).
  - LIS note: database contains information for some 25 advanced countries for one or more years; for most countries, data are available only up to 2000.

### The Facts — key empirical findings and statistics
- Median real hourly wages of prime-age males:
  - United Kingdom: median wage increased by 30 percent from 1979 to 2000.
  - West Germany (1981-2000): median wage increased by about 14 percent.
  - United States (1979-2000): median wage increased by about 5 percent.
  - Median hourly wage for prime-age males was roughly 16 U.S. dollars in these countries in 2000 (converted at PPP exchange rates).
- Bernanke reference: median hourly wage of full-time workers rose by about 11.5 percent between 1979 and 2006 (mentioned in source).
- Relationship between labor share and income inequality:
  - Plotting changes in labor shares against changes in the Gini coefficient for net disposable income does not suggest an obvious relationship.
  - Correlation coefficient reported in the sample: 0.3.
- Wage inequality patterns:
  - Wage inequality increased in virtually all countries for which data were available.
  - Wage inequality increased significantly more in Denmark and the United States than income inequality.
  - Income inequality grew much stronger in Belgium than wage inequality.
- Dynamics across countries and over time:
  - Few common developments across advanced countries with respect to inequality; changes occurred at different times and in different parts of the wage distribution.
  - Germany (West): wage distribution relatively stable during the 1980s; inequality grew sharply in the late 1990s in the lower half.
  - Denmark: inequality grew mostly in the lower half during the 1990s.
  - Belgium, France, Italy, Netherlands: wage distributions relatively stable.
  - United Kingdom: sharp increase in inequality across all wage groups until mid-1990s and modest rise at the top since then.
  - United States: largest increase in wage inequality in the early 1980s; further increase in the 1990s mainly in the upper half of the distribution.
- Polarization (hollowing out of the middle):
  - Observed in the United States and the United Kingdom, and to some extent in Sweden, as shown by shifts in relative wage distributions (wages deflated with median wages; percentile cutoffs held constant by base year).

### Quantitative wage-dispersion measures (selected entries from Table 1 — Log percentile differentials for male hourly wages)
- Log 90th-10th Hourly Wage Differential (selected country series):
  - United States: Early 1980s 1.16; Mid 1980s 1.40; Early 1990s 1.33; Mid 1990s 1.39; Early 2000s 1.43.
  - United Kingdom: Early 1980s 0.72; Mid 1980s 1.08; Early 1990s 1.10; Mid 1990s 1.18; Early 2000s 1.22.
  - Denmark: Early 1980s -0.86; Mid 1980s 0.92; Early 1990s 0.99; Mid 1990s 1.03.
  - France: Early 1980s 0.97; Mid 1980s 1.05; Early 1990s 1.08; Mid 1990s 1.02; Early 2000s 1.00.
- Log 90th-50th Hourly Wage Differential (selected entries):
  - United States: Early 1980s 0.56; Mid 1980s 0.66; Early 1990s 0.60; Mid 1990s 0.68; Early 2000s 0.73.
  - United Kingdom: Early 1980s 0.30; Mid 1980s 0.59; Early 1990s 0.59; Mid 1990s 0.64; Early 2000s 0.67.
- Log 50th-10th Hourly Wage Differential (selected entries):
  - United States: Early 1980s 0.60; Mid 1980s 0.74; Early 1990s 0.73; Mid 1990s 0.71; Early 2000s 0.70.
  - United Kingdom: Early 1980s 0.42; Mid 1980s 0.49; Early 1990s 0.51; Mid 1990s 0.55; Early 2000s 0.55.
- Data notes: Data for Denmark and Sweden are based on annual wages; for Belgium, France, and Italy on net wages.

### Analysis — interpretation and competing hypotheses
- Measurement and interpretation caveats:
  - Poor measurement of income other than wage income (capital gains, interest, dividends, profits) may obscure relationships between labor share and income inequality.
  - Labor share measurement issues: when computed on the basis of value added at market prices, indirect taxes less subsidies are a wedge; a fall in labor's share could be associated with a rise in the share of indirect taxes less subsidies rather than capital.
  - A decline in the labor share is not necessarily a fall in real wages; it can occur if real wages rise but fail to keep up with average labor productivity.
  - Bentolila and Saint-Paul (2003) show the correlation between changes in wages and changes in the labor share is relatively weak for a sample of 12 OECD countries.
- Explanatory roles considered:
  - Skill-biased technological change, globalization, and between-industry shifts in labor demand have been emphasized in the literature (particularly for the United States).
  - Alternative explanations include declining real minimum wages (Card and DiNardo (2002), Lemieux (2006)) and changes in labor force composition (rising education and experience).
  - Country-specific events and policies may be more important than global trends in explaining cross-country differences.
  - Labor market institutions (wage compression, minimum wages, unionization) may have played an important role in limiting or shaping inequality changes in Europe; however, evidence and theory provide mixed implications (e.g., Acemoglu (2003) model vs. observed stability in upper parts of distributions).
  - The timing mismatch between acceleration in technology/globalization in the 1990s and a slowdown in inequality growth raises doubts about attributing inequality changes solely to globalization or technology.

### Implications emphasized in the source text
- Summary measures (e.g., Gini coefficient) may miss where in the distribution changes occur; detailed percentile and distributional analysis is necessary to discriminate among hypotheses.
- Country- and period-specific patterns matter: policy and institutional factors should be examined alongside global economic forces when assessing drivers of wage and income inequality.

*Source: _wp07169 (excerpts provided). This overlay summarizes the paper's Introduction, data approach, empirical findings, quantitative indicators from Table 1, and interpretive discussion as presented in the source content.*

### Box 1. Rising Wage Inequality in the United States—A Brief Survey of the Literature

### Box 1. Rising Wage Inequality in the United States—A Brief Survey of the Literature

### Overview and historical context
- From the 1940s to the 1970s, the distribution of earnings and incomes in the United States remained remarkably stable.
- A marked acceleration in the growth of earnings inequality began in the late 1970s and was documented in the literature in the early 1990s (Katz and Murphy (1992); Levy and Murnane (1992)).
- The college wage premium expanded dramatically in the 1980s, after having fallen in the 1970s.

### Early consensus: skill-biased change and industry shifts
- Early literature concluded that:
  - Economic pressures toward increased inequality and skill wage differentials were mostly driven by skill-biased technological change and between-industry shifts in labor demand.
  - Katz and Murphy (1992) noted rising wage inequality within groups defined by education and experience since the early 1970s, indicating distinct phenomena behind educational differentials and within-group inequality.

### Trade, prices, and globalization debates
- Factor content models predicted a small impact of trade on wages in advanced countries because imports of manufactured goods from developed countries amounted to less than 2 percent of the combined GDP of the OECD in the 1980s.
- Leamer (1996) argued that prices rather than quantities mattered: economic liberalizations in Asia, Eastern Europe, and Latin America affected U.S. and European labor markets through declines in prices of labor-intensive tradables.
- Krugman (2000) contested Leamer’s view, showing in a two-country general equilibrium model that prices and wages were predominantly determined by developments in the large country (i.e., the OECD).

### Technology, job tasks, and polarization
- Autor, Katz and Kearney (2005) summarize two broad conclusions:
  - Much of the rise in U.S. earnings inequality during the 1980s appears explained by shifts in labor supply and demand for skills combined with the erosion of labor market institutions—including labor unions and the minimum wage—that protected earnings of low- and middle-wage workers.
  - The surge of inequality in the 1980s also reflected a secular rise in the demand for skill, possibly linked to the computer revolution and other technological advances.
- Autor, Katz and Kearney (2006) conclude that the changing distribution of job task demands, spurred directly by advancing information technology and indirectly by its impact on outsourcing, helps interpret recent polarization of the wage structure in the U.S.

### Revisionist critiques: non-market factors and episodic explanations
- Some studies challenge the supply-and-demand explanation and attribute much of the rise in inequality to non-market factors:
  - Card and DiNardo (2002) argue the rise in inequality during the 1980s is largely explained by the declining real value of the minimum wage and characterize the growth in U.S. earnings inequality as primarily a one-time event of the early 1980s.
  - Lemieux (2006) argues the fall in the minimum wage explains most of the surge in inequality in the 1980s but finds that changing labor force composition during the 1990s (rising education and experience) contributed to further inequality.

### Cross-country labor market reforms and divergent outcomes
- Many European countries substantially reformed labor markets and institutions over recent decades, which may explain differences in wage inequality trends.
- Annett (2006) studies Denmark, Ireland, the Netherlands, and the United Kingdom — countries that undertook major reforms and stand out in terms of success in reducing unemployment:
  - Ireland and the Netherlands centered reforms on consensus-based agreements between social partners, trading wage moderation for labor tax cuts.
  - The United Kingdom weakened the power of unions.
  - Denmark concentrated on benefits reform: continued generous benefit levels with lower duration, tougher conditionality, and stricter activation requirements.
- These different reform patterns may help explain observed outcomes:
  - The United Kingdom experienced a sharp increase in inequality.
  - Wage inequality remained relatively stable in the Netherlands and increased only slightly in Denmark.
  - Income inequality actually fell in both the Netherlands and Denmark.
- Footnote: Income inequality has also remained stable in Ireland from 1987 to 2000. Wage data are only available starting in 1994.

### Conclusion (IV)
- The evolution of income and wage inequality is a complex phenomenon driven by many factors that played different roles across countries.
- Developments in income and wage inequality differed appreciably across advanced economies:
  - Changes in wage inequality occurred at different times and in different parts of the wage distribution across countries.
  - Labor markets in the United States and the United Kingdom witnessed some polarization.
  - Wage distributions in euro-area countries have not followed any common trend and have remained relatively stable in several countries.
- No consensus exists on why inequality increased in some industrialized countries but not others:
  - Some attribute increased inequality to skill-biased technological change and changing job task demands, spurred by information technology and outsourcing (leading some to blame globalization).
  - Others argue the rise in inequality is largely explained by changes in labor market institutions, including minimum wages and the degree of unionization; this interpretation fits the stylized facts presented in this box much better.

### Data appendix: sample and data sources
- Data source: Luxembourg Income Study (LIS), which harmonizes and standardizes micro-data from national household surveys to facilitate comparative research.
- Access note: The datasets can be accessed via the internet mailing system by submitting SAS, SPSS or STATA programs. http://www.lisproject.org/
- Sample restrictions used in the analysis:
  - Wage income of male household heads, aged 18 to 64.
  - Worked at least 48 weeks per year and more than 35 hours per week.
  - Observations with the lowest 1 percent earnings are excluded.
  - Observations with an income above ten times the median wage are excluded.
- More detailed information on data sources and definitions can be found on the LIS website.

*Source: Box 1, "_wp07169 - Box 1. Rising Wage Inequality in the United States—A Brief Survey of the Literature" (PDF).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07169.pdf_