Skills and wage inequality

By Stijn Broecke.

Income inequality has been rising in a large majority of OECD countries and, in most of them, is now at its highest level in 30 years. Today, the richest 10% of the population in the OECD area receive 9.5 times more income each year than the poorest 10%. Arresting the trend rise in income inequality has become an increasingly pressing concern for policy makers, as the significant economic and social costs associated with it have become better understood.

At an aggregate level, countries with higher skills levels tend to have lower wage inequality (Figure 1). The OECD Employment Outlook 2015 (Chapter 2: Skills and wage inequality) confirms that skills policies can play an important role within a comprehensive strategy to reduce wage inequality. It shows that investing in skills matters for wage inequality – particularly if they are scarce in relation to demand – and that countries where skills are less equally distributed tend to have higher wage inequality. The Outlook further shows that putting skills to better use can help reduce wage inequality, by strengthening the links between workers’ skills, productivity and wages.

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Link: Survey of Adult Skills (PIAAC) (2012).

These findings are not surprising, given that more skilled workers earn a wage premium in the labour market. Figure 2 shows that in England/Northern Ireland and the United States, the most skilled earn wages twice as high as those of the least skilled. By contrast, in Denmark, there is very little difference in the average wages of the most and least skilled workers. Higher returns to skill will reflect both how scarce skills are in relation to demand, as well as differences in labour market institutions which determine the “price” of skill, such as the level of the minimum wage and collective bargaining arrangements.

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Link: Survey of Adult Skills (PIAAC) (2012).

The type of skills policies required will vary from country to country. For example, the Employment Outlook estimates that a 10% reduction in skills inequality in the United States would reduce wage inequality by 1.2%.  In the Netherlands, by contrast, the focus should be on improving skills use: a 10% decline in the dispersion of skills use could reduce wage inequality by an estimated 1.1%.

See also:

OECD (2015), Employment Outlook 2015, OECD Publishing, Paris.

OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris.

Photo Credit: ©Shutterstock

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