Institutional effects on skill premium

Abstract

Skill premium in the United Kingdom has increased substantially since the 1970s. This paper analyzes the link between institutions and the skill premium in the UK controlling for other explanatory variables such as market conditions, international trade and skill-biased technology. For the private sector, institutions are more important for the unskilled baseline group than the skilled groups. The trade union decline after 1979 brings different effect on wages of skilled and unskilled workers and pushes the skill premium up. We find that the trade union decline in unskilled workers can explain about one third degree premium increase over the period 1979-1998. The overall effect of trade union in all workers can explain about 13.34 percent of degree premium increase during the same period. Our results are insensitive to skill group categorization. Moreover, we find that minimum wages can only decrease skill premiums of high skilled workers rather than low skilled workers. The increase of unemployment benefit over the period 1979-1998 reduces the increasing the skill premium by about 13.6 percent. But, the mark-up effect of taxation increase skill premium by about 8.26 percent. We find no significant associations between above institutions and skill premiums in the public sector