Shaping earnings instability: labour market policy and institutional factors

The concerns regarding the economic insecurity stemming from earnings instability have been gaining momentum in the contemporary political discourse. If earnings instability is as a proxy for risk, for risk-averse individuals, increasing earnings instability bears substantial welfare costs. Using the variance of transitory earnings estimated using the European Community Household Panel (ECHP) and the OECD labour market indicators, we explore by means of non-linear least squares the relationship between earnings instability and labour market policies/institutions across Europe in the 1990s. We find of a complex system of interactions within the institutional framework affecting earnings instability. For an average country with a low corporatism, we find a U-shape relationship between earnings instability and the strictness of labour market regulation. Corporatist systems have a lower earnings instability than decentralized economies, they are effective in reducing the adverse effects of macroeconomic shocks on earnings instability, and can counteract the increase in earnings instability associated with the development of ALMPs, with unionization, with product market regulation and with the tax wedge. The earnings instability associated with developed ALMPs is reduced by regulated labour markets, a high corporatism, low non-wage labour costs and high unemployment benet replacement rates (UBRR). The decrease in earnings instability associated with an increase in the UBRR is the largest for developed ALMPs.economic insecurity, earnings instability, labour market institutions, labour market policies

Policy, Institutional Factors and Earnings Mobility

This paper uses ECHP and OECD data for 14 EU countries to explore the role of labour market factors in explaining cross-national differences in the dynamic structure of earnings: in permanent inequality, transitory inequality and earnings mobility. Based on ECHP, minimum distance estimator is used to decompose earnings inequality into the permanent and transitory components and compute earnings mobility. The predicted components together with the institutional OECD data are used in a non-linear least squares setting to estimate the relationship between permanent inequality, transitory inequality and earnings mobility, and labour market policy and institutional factors. The results revealed a highly complex framework, where institutions interact significantly not only with each other and with the overall institutional setting, but also with the macroeconomic shocks in shaping the pattern of the three labour market outcomes.panel data, wage distribution, inequality, mobility, labour market institutions, labour market policies

Earnings Dynamics and Inequality in EU, 1994-2001

This paper uses ECHP for 14 EU countries to explore the dynamic structure of individual earnings and the extent to which changes in cross-sectional earnings inequality reflect transitory or permanent components of individual lifecycle earnings variation. Increases in inequality reflect increases in permanent differentials in four countries and increases in both components in two. Decreases in inequality reflect decreases in transitory differentials in four countries, in permanent differentials in two and in both components in rest. In general, increases in inequality are accompanied by decreases in mobility, whereas only in three countries the increase in mobility is determined by the decrease in inequality.Panel data, wage distribution, inequality, mobility

Increased Opportunity to Move up the Economic Ladder?: Earnings Mobility in EU: 1994-2001

Do EU citizens have an increased opportunity to improve their position in the distribution of earnings over time? This question is answered by exploring short and long-term wage mobility for males across 14 EU countries between 1994 and 2001 using ECHP. Mobility is evaluated using rank measures which capture positional movements in the distribution of earnings. All countries recording an increase in cross-sectional inequality recorded also a decrease in short-term mobility. Among countries where inequality decreased, short-term mobility increased in Denmark, Spain, Ireland and UK, and decreased in Belgium, France and Ireland. Long-term mobility is higher than short-term mobility, but long-term persistency is still high in all countries. The lowest long-term mobility is found in Luxembourg followed by four clusters: first, Spain, France and Germany; second, Netherlands, and Portugal; third, UK, Italy and Austria; forth, Greece, Finland, Belgium and Ireland. The highest long-term mobility is recorded in Denmark.Panel data, wage distribution, inequality, mobility

Equalizing or Disequalizing Lifetime Earnings Differentials? Earnings Mobility in the EU: 1994-2001

Do EU citizens have an increased opportunity to improve their position in the distribution of lifetime earnings? To what extent does earnings mobility work to equalize/disequalize longer-term earnings relative to cross-sectional inequality and how does it differ across the EU? Our basic assumption is that mobility measured over a horizon of 8 years is a good proxy for lifetime mobility. We used the Shorrocks (1978) and the Fields (2008) index. Moreover, we explored the impact of differentials attrition on the two indices. The Fields index is affected to a larger extent by differential attrition than the Shorrocks index, but the overall conclusions are not altered. Based on the Shorrocks (1978) index men across EU have an increasing mobility in the distribution of lifetime earnings as they advance in their career. Based on the Fields index (2008) the equalizing impact of mobility increases over the lifetime in all countries, except Portugal, where it turns negative for long horizons. Thus, Portugal is the only country where mobility acts as a disequalizer of lifetime differentials. The highest lifetime mobility is recorded in Denmark, followed by UK, Belgium, Greece, Ireland, Netherlands, Italy, France, Spain, Germany, and the lowest, Portugal. The highest mobility as equalizer of longer term inequality is recorded in Ireland and Denmark, followed by France and Belgium with similar values, then UK, Greece, Netherlands, Germany, Spain and Italy.panel data, wage distribution, inequality, mobility

Earnings Dynamics and Inequality among Men in Luxembourg, 1988-2004: Evidence from Administrative Data

Starting with the late 1980s and intensifying after early 1990s, Luxembourg evolved from an industrial economy to an economy dominated by the tertiary sector, which relies heavily on the cross-border workforce. This paper explored the implications of these labour market structural changes for the structure of earnings inequality and earnings mobility. Using an extraordinary longitudinal dataset drawn from administrative records on professional career, we decomposed Luxembourg’s growth in earnings inequality into persistent and transitory components and explored the extent to which changes in cross-sectional earnings inequality between 1988 and 2004 reflect changes in the transitory or permanent components of earnings. Thanks to the richness of the Luxembourgish data set, we are able to estimate a much richer model that nests the various specifications used in the US, Canadian and European literature up to date, thus rejecting several restrictions commonly imposed in the literature. We find that the growth in earnings inequality reflects an increase in long-term inequality and a decrease in earnings instability, and is accompanied by a decrease in earnings mobility. Thus in 2004 compared with 1988, low wage men in Luxembourg are worst off both in terms of their relative wage and in terms of their opportunity of improving their relative income position in a lifetime perspective.panel data, wage distribution, inequality, mobility

Increased Opportunity to Move Up the Economic Ladder? Earnings Mobility in EU: 1994-2001

Do EU citizens have an increased opportunity to improve their position in the distribution of earnings over time? This question is answered by exploring short and long-term wage mobility for males across 14 EU countries between 1994 and 2001 using ECHP. Mobility is evaluated using rank measures which capture positional movements in the distribution of earnings. All countries recording an increase in cross-sectional inequality recorded also a decrease in short-term mobility. Among countries where inequality decreased, short-term mobility increased in Denmark, Spain, Ireland and UK, and decreased in Belgium, France and Ireland. Long-term mobility is higher than short-term mobility, but long-term persistency is still high in all countries. The lowest long-term mobility is found in Luxembourg followed by four clusters: first, Spain, France and Germany; second, Netherlands, and Portugal; third, UK, Italy and Austria; forth, Greece, Finland, Belgium and Ireland. The highest long-term mobility is recorded in Denmark.panel data, wage distribution, inequality, mobility

Policy, Institutional Factors and Earnings Mobility

This paper uses ECHP and OECD data for 14 EU countries to explore the role of labour market factors in explaining cross-national differences in the dynamic structure of earnings: in permanent inequality, transitory inequality and earnings mobility. Based on ECHP, minimum distance estimator is used to decompose earnings inequality into the permanent and transitory components and compute earnings mobility. The predicted components together with the institutional OECD data are used in a non-linear least squares setting to estimate the relationship between permanent inequality, transitory inequality and earnings mobility, and labour market policy and institutional factors. The results revealed a highly complex framework, where institutions interact significantly not only with each other and with the overall institutional setting, but also with the macroeconomic shocks in shaping the pattern of the three labour market outcomes.Panel data, wage distribution, inequality, mobility, labour market institutions, labour market policies

Earnings Dynamics and Inequality among Men across 14 EU Countries, 1994-2001: Evidence from ECHP

This paper analyses the dynamic structure of individual earnings across 14 EU countries over the period 1994-2001 using ECHP. Understanding wage mobility and its link with the evolution of cross-sectional earnings inequality is important from a welfare perspective, particularly given the large variety in national cross-sectional wage inequality. This is highly relevant in the context of the changes that took place in the EU labour market policy framework after 1995 under the incidence of the 1994 OECD Jobs Strategy, which recommend policies to increase wage flexibility, lower non-wage labour costs and allow relative wages to better reflect individual differences in productivity and local labour market conditions. What is the source of earnings variation? Did the increase in cross-sectional wage inequality observed in some countries result from greater transitory fluctuations in earnings and individuals facing a higher degree of earnings mobility? Or is this rise reflecting increasing permanent differences between individuals with mobility remaining constant or even falling? Are there common trends in earnings inequality and mobility across countries? Equally weighted minimum distance methods are used to estimate the covariance structure of earnings, decompose earnings into a permanent and a transitory component and conclude about their evolution. As expected, a notable change was an increased country heterogeneity, which translated itself in the level and evolution of the cross-sectional earnings inequality components. The decrease in cross-sectional inequality was accompanied by an increase in mobility, and therefore a decrease in the importance of the permanent component relative to the transitory component in Denmark, Belgium and Spain, and by a decrease in earnings mobility in Germany, France, UK, Ireland and Austria. In Luxembourg, Italy, Greece, Portugal, and Finland, the increase in cross-sectional inequality was accompanied by a decrease in mobility, whereas in Netherlands by an increase.panel data, wage distribution, inequality, mobility

Shaping Earnings Mobility: Policy and Institutional Factors

This paper explores the role of labour market policy and institutional factors in explaining cross-national differences in earnings mobility across Europe in the 1990s using the European Community Household Panel and OECD data on institutional variables. More regulation in both labour and product markets emerge as sources of labour market rigidity, being positively associated with earnings immobility and exacerbating the adverse effects of macro-economic shocks on earnings mobility. Unionization is found to promote earnings mobility, effect, however, counteracted in periods with adverse macroeconomic shocks. Corporatism is found to promote mobility and to counteract the adverse effects of macroeconomic shocks on earnings mobility. The generosity of the unemployment benefit is found to limit the adverse effects of macroeconomic shocks on earnings mobility.Wage Distribution, Inequality, Earnings Mobility, Labour Market Institutions; Labour Market Policies