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WAGE INEQUALITY IN SPAIN: New evidence of the impact of boom and bust in the housing market

  • Published Date: August 2017

Rises and falls in the demand for construction workers have had a big impact on earnings inequality in Spain, according to new research by Stéphane Bonhomme and Laura Hospido, published in the August 2017 issue of the Economic Journal.

Their study shows that the evolution of inequality in Spain over recent decades has been strongly countercyclical: earnings inequality increased around the 1993 recession; it experienced a substantial decrease during the 1997-2007 expansion; and then there has been a sharp increase during the recent recession. This evolution went in parallel with the cyclicality of employment in the lower-middle part of the wage distribution.

These findings highlight the importance of the housing boom and bust in the evolution of inequality in Spain, suggesting that demand shocks in the construction sector had large effects on aggregate labour market outcomes.

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Over the last three decades, the Spanish economy has experienced a long period of expansion between two severe recessions – the 1993 recession; and the ‘Great Recession’ from 2008 – both of which were characterised by sharp drops in GDP growth and increases in unemployment. The level and volatility of unemployment are particularly high relative to other OECD countries.

The new study uses Spanish administrative data to document the consequences of these large cyclical variations for the evolution of earnings inequality. Figure 1 shows the main descriptive result: the evolution of the logarithm of the 90/10 percentile ratio of male daily earnings – a commonly used measure of inequality – between 1990 and 2010.

Figure 1 shows that inequality closely followed the evolution of the unemployment rate. During the 1997-2007 expansion, inequality decreased by 10 log points, while between 2007 and 2010, it increased by the same amount. These are large fluctuations by international standards. By comparison, in the United States, male inequality increased by 16 log points between 1989 and 2005, while the increase in German earnings inequality was slightly lower (see Table 1).

The results show that the countercyclical evolution of Spanish male inequality was partly driven by changes in the composition of employment, notably in the middle part of the distribution. Figure 2 illustrates this, by showing variations in employment probabilities across the earnings distribution, between the 1993 recession and the expansion (left graph) and between the expansion and the 2008 recession (right).

The right graph shows that the employment losses during the recent recession have been larger in the lower-middle part of the distribution than in the tails. The left graph shows that employment gains during the expansion were also concentrated in the lower-middle part of the distribution.

This pattern is consistent with inequality falling during the expansion, as employment increased in the middle of the distribution. It is also consistent with inequality increasing in the recent recession, as a large share of lower-middle wage workers lost their jobs.

To understand the sources of this evolution, a sectoral view is particularly helpful. The upper panel in Figure 3 shows the evolution of employment shares by sector. To facilitate interpretation, sectors are aggregated sectors into four broad categories: industry (other than construction); construction; private services; and public services.

The graphs show the decline of industry in employment and the pro-cyclical evolution of the share of construction. Between 1997 and 2007, the share of construction in male employment increased from 14% to 21%, then it sharply decreased to 13% in 2010, below its 1990 level.

The lower panel in Figure 3 shows that earnings in the construction sector increased during the period, particularly during the expansion episode. Comparing the relative rank of construction workers with its employment share suggests that the construction sector in Spain has had important consequences for the evolution of earnings inequality.

To assess quantitatively the influence of sectors versus other factors, the researchers decompose the evolution of inequality into changes in employment composition and changes in labour prices. They find that when accounting for sectoral differences, composition effects fully explain the evolution of the 90/10 ratio between 1997 and 2010.

While the analysis emphasises the role of the construction sector, other explanations may help to explain the evolution of male earnings inequality in Spain. The researchers consider immigration and labour market institutions, such as the minimum wage and the duality between permanent and temporary contracts, as potential explanations.

In summary, the new evidence shows that there has been no apparent trend in the evolution of earnings inequality in Spain, but there have been marked countercyclical fluctuations. The construction sector appears to have played a special role in the countercyclical evolution of male earnings inequality in Spain.

The Spanish boom of the late 1990s and 2000s was also a housing boom. Parallel to this evolution, relative employment of construction workers rose, and subsequently fell during the housing bust. During the expansion, both employment and the relative earnings of construction workers rose steadily, which is consistent with the implications of a positive demand shock in this particular sector.

Overall, this evidence suggests that policies that foster the demand for housing may have sizeable effects on labour market outcomes.

ENDS


Notes for editors: ‘The Cycle of Earnings Inequality: Evidence from Spanish Social Security Data’ by Stéphane Bonhomme and Laura Hospido is published in the August 2017 issue of the Economic Journal.

Stéphane Bonhomme is at the University of Chicago. Laura Hospido is at the Banco de España.

The opinions and analyses are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.

For further information: contact Stéphane Bonhomme on +1 (773) 834-6831 (email: sbonhomme@uchicago.edu); Laura Hospido on +34 91 338 5625 (email: laura.hospido@bde.es); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).

Figure 1: Earnings inequality (males) and unemployment in Spain, 1990-2010

Source: Social security data and OECD
Notes: Logarithm of the estimated 90/10 percentile ratio of daily earnings (left axes) and aggregate unemployment rate (right axes).

Table 1: Changes in log-percentile ratios (×100, males)

Notes: * Hourly inequality measures from Autor et al. (2008). ** Daily inequality measures estimated from Spanish social security data. *** Daily inequality measures from Dustmann et al. (2009)

Figure 2: Employment growth as a function of daily earnings (males)

Source: Social security data.
Notes: y-axis: difference in percentage of days worked by an individual relative to days present in the sample, between 1993-1996 and 2001-2007 (left), and between 2001-2007 and 2008-2010 (right). x-axis: rank of an individual in the distribution of median daily earnings during the period. Local linear regression, bandwidth chosen by leave-one-out cross-validation.

Figure 3: Employment shares and earnings ranks, by sector

Source: Social security data.
Notes: The upper graphs show employment shares, by sector. The lower graphs show sector-specific averages of ranks of daily earnings in the aggregate distribution.