The Low Paid Are Worse Off Than They Were 20 Years Ago – And They Find It Much Harder To Get Better Paying Jobs

03 Jan 2000

It is well known that wage inequality has risen sharply over the last two decades in Britain. It is perhaps less well known that differences between the earnings of the highest and lowest paid are now greater than they were a century ago. And according to new research on lifetime differences in earnings between individuals by Richard Dickens, published in the latest issue of the Economic Journal, the outlook for the low paid is even bleaker than that. Not only are they worse off in relative terms, but they also find it more difficult to progress into better paying jobs than they did 20 years ago.

Dickens notes that the increase in cross-sectional dispersion of earnings has been well documented by economists. But these cross-section studies provide only a snapshot of earnings at different points in time. They tell us nothing about permanent or lifetime differences between individuals and the degree of ''persistence'' in an individual''s earnings; do the high paid and low paid stay in their respective positions or is there mobility that means the low paid progress to better wages? In addition, given that cross-section earnings inequality has increased, has this been offset or exacerbated by changes in mobility?

Dickens' study examines the degree of persistence in earnings using a unique data source, which follows the same individuals over time for 20 years, giving repeated measures of their earnings at yearly intervals. He uses this data to estimate statistical models of earnings, breaking down earnings differences into ''permanent'' and ''transitory'' differences. Permanent differences last forever and may reflect permanent differences in ability between individuals. Transitory differences die out over time and may reflect different job characteristics or bonus payments.

The results show that about half of the rise in cross-section inequality is due to a rise in permanent differences between workers, with the other half explained by the transitory differences. What is more, the transitory component is found to have quite long-lasting effects. Consequently, over half of the increase in cross-section inequality is due to increasing differences between individuals that last a good many years.

The results by different skill groups are somewhat different. For those in higher skilled jobs, the increase in inequality is largely driven by increases in transitory differences between these workers; whereas for lower skilled groups, permanent differences are most important. From a welfare perspective, Dickens'' results are disturbing. If the increase in cross-section wage inequality had been a result of increasing transitory differences in earnings, then we may not be so concerned since over an individual''s lifetime, there would be no difference in inequality.

But the fact that over half of the increase in inequality is driven by persistent differences suggests that lifetime earnings differences may have risen by even more than observed in the cross-section. Not only are the low paid worse off in relative terms, but they also find it more difficult to progress into better paying jobs than they did 20 years ago.

''The Evolution of Individual Male Earnings in Great Britain: 1975-95'' by Richard Dickens is published in the January 2000 issue of the Economic Journal. Dickens is at the Centre for Economic Performance at the London School of Economics.

Richard Dickens

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