Volume 31, Issue 1. Exploring the inter-industry wage premia in Portugal along the wage distribution: evidence from EU-SILC data

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1 Volume 31, Issue 1 Explorng the nter-ndustry wage prema n Portugal along the wage dstrbuton: evdence from EU-SILC data Marco Bagett lan Mnstry of Economc Development, Department of Economc and Socal Coheson Sergo Sccchtano Unversty of Rome "La Sapenza" and Italan Mnstry of Economc Development Abstract In ths artcle we nvestgate whether nequalty n the nter-ndustry wage prema may be explaned by unobserved dfferences n workers' educatonal sklls. We use the last 007 wave of EU-SILC data set for Portugal, a naton whch can be consdered a case-study, due to ts tradtonal hgh nter-ndustry wage dsperson. Applyng both OLS and Quantle Regresson technques, our results suggest that qualty dfferences across workers stll reman an rrelevant matter n the wage prema determnaton, even after many noteworthy educatonal reforms adopted n that country snce the begnnng of the 1990s. We would lke to thank the assocate edtor Dan Anderberg, Marco Marn and an anonymous referee for helpful comments. The vews expressed n ths artcle are those of the authors and, n partcular, do not necessarly reflect those of the Mnstry of Economc Development. The usual dsclamer apples. Ctaton: Marco Bagett and Sergo Sccchtano, (011) ''Explorng the nter-ndustry wage prema n Portugal along the wage dstrbuton: evdence from EU-SILC data'', Economcs Bulletn, Vol. 31 no.1 pp Submtted: Dec Publshed: January 04, 011.

2 1. Introducton There s a wde consensus that the nter-ndustry wage nequalty across countres remans a relevant topc n the current economc lterature. As a matter of fact, snce the semnal artcle by Krueger and Summers (1988) some emprcal analyss have explored possble explanatons. Partcularly, unobserved qualty dfferences across workers have also been called to explan the behavor of ncome nequalty among ndustres, n dfferent countres (e.g., Gbbons and Katz, 199). In ths context, Portugal s a chefly sutable country, because ts nter-ndustry wage dsperson s found to be hgh when compared wth other European countres (Hartog et al. 001). In such context, Martns (004), by usng a 1995 Portuguese data set, ponted out that - at the begnnng of the 1990s - unobservable dfferences across workers were not a crtcal element n determnng ndustry wage prema n that country. Exactly snce the early nnetes a perod of strong economc expanson began n Portugal, enhanced by several economc reforms. At the same tme obvous changes n many aspects of the ncome dstrbuton occurred (Budra 010). In partcular, the mprovement n the qualty of educaton and a stronger match between acheved educatonal levels and occupatons were the key elements for the reforms of the schoolng system n that country durng the 1990s (OECD 010). Portuguese government defned new currcula and establshed upper-secondary educaton as a three-year cycle. Moreover, vocatonal schools were granted a new legal framework n These schools absorb a substantal number of students seekng a job-orented tranng after completng the 9 th form of basc schoolng, representng the most mportant alternatve tranng path leadng to a professonal qualfcaton offered by the offcal educatonal system. Partcular attenton was also gven to the tertary level. The new legslaton allowed publc unverstes, on a voluntary bass, to acqure ndependent legal status n the form of publc foundatons governed by prvate law. The new envronment should have facltated stronger educatonal lnks to professons, regons and labor markets and more effectve unversty-ndustry lnks for research and nnovaton. Overall, the reform provded a sound bass to mprove the ablty of Portuguese educaton to rase hgher-level employment sklls. In ths artcle we demonstrate that actually n Portugal, even after these relevant economc reforms, ndvdual sklls stll reman an rrelevant matter n the wage determnaton, whle non-compettve factors contnue to play a more mportant role. To address ths ssue we apply a Quantle Regresson (QR) sem-parametrc approach to the last 007 wave of the European Unon Statstcs on Income and Lvng Condtons nqury (EU-SILC), the new European homogenzed panel survey, whch - to the best of our knowledge - has never been used yet n explorng the unobserved qualty explanaton of ndustry wage dfferentals. The QR method s more nterestng, as well as more sutable, for t allows us to get a partcularly precse pcture of the dynamcs of the dependent varable at dfferent ponts of the dstrbuton, rather than at the condtonal mean. Overall, the artcle supports the dea that n Portugal there s not only a relevant cross-ndustres dsperson n returns to educaton, but also a hgh heterogenety n wage prema at dfferent ponts of the wage dstrbuton, whch OLS modelng of condtonal average of a dependent varable completely fals to account for. In partcular, we fnd evdence that, although recent governmental efforts endeavourng to mprove the qualty 1

3 of educaton across workers, t cannot be called yet to spell out Portuguese nequalty n the nter-ndustry wage prema. Ths emprcal artcle s organzed as follows. The next secton descrbes the data. Secton 3 llustrates our econometrc specfcaton. Secton 4 reports the results. Secton 5 dsplays the robustness check, whle n the last secton we present our man conclusons.. Data Data are collected from the 007 EU-SILC survey, avalable snce March 1 st 009. It s the new homogenzed panel survey that has replaced European Communty Household Panel (ECHP). Our analyss focuses on Portuguese full-tme male workers aged between 5 and 65: women have been dsregarded on account of potental selectvty bases. Younger males have been also dropped because they are stll n the almost exclusvely educatonal perod of ther lfe,.e. they are very much more lkely enrolled n a secondary or tertary course than performng a work actvty whatsoever. In the 007 EU-SILC wave 4,665 Portuguese men are ntervewed: yet, our dependent varable - the hourly (logarthmc) gross wage s avalable for 1,735 full-tme Portuguese maleworkers aged between 5 and 65 years. These consttute our reference sample. Our regressors are schoolng years, whch has been bult up followng the usual framework 1, the number of years spent n pad work and ts squared: the second s regarded as beng a proxy for ndvdual experence whle the thrd takes account of possble non lneartes. Sectors surveyed are those consdered n EU-SILC,.e. the 1 macro-sectors obtaned by jonng several NACE 1.1 classfcaton codes (see table 1 for further detals). Tab. 1. Summary statstcs Industres - NACE 1.1 Class. EU-SILC class. % Fshng, Agrculture, huntng and forestry a+b 7.17 Mnng and quarryng, Manufacturng, Electrcty, gas and water supply c+d+e.96 Constructon f 19.4 Wholesale and retal trade; repar of motor vehcles, motorcycles and personal and household good g Hotels and restaurants h 4.49 Transport, storage and communcaton 5.67 Fnancal ntermedaton j.31 Real estate, rentng and busness actvtes k 4.81 Publc admnstraton and defence, compulsory socal securty l Educaton m 3.13 Health and socal work n 1.86 Other communty, socal and personal servce actvtes, Prvate households wth employed persons, Extra-terrtoral organzatons and bodes o+p+q.31 Total That usual framework refers to makng use of the hghest ISCED level of educaton attaned by a male worker, and for each level assgnng the legal mnmum number of years typcally requred to acheve t: more precsely, those who reached only an ISCED 1 grade have been gven 5 years of schoolng; 8 years of school have been assgned to those wth an ISCED grade; 13 years to those wth an ISCED 3; 14 to men who attaned an ISCED 4 grade and 18 years to those who reached an ISCED 5

4 3. Econometrc specfcaton: OLS versus quantle regresson We assume our OLS specfcaton to have the followng form: ln w = α + β S + γ X + δ X + ε (1) As s well known, OLS mplctly assume that the mpact of the regressors along the condtonal dstrbuton of the response varable are rrelevant. But as s already equally known covarates may nfluence t on ts whole shape. Ths case can be studed by performng a quantle regresson (QR), whch has the followng functonal form (Koenker & Basset, 1978): Quant + :ln w x β ln w ( α + β S + γ X + δ X ) + ( ) ( ) 1 ln w α + βs + γ X + δ X :ln w xβ () The equaton () s normally wrtten as: mn k β R ρ ( ln w α β S γ X δ X ) (3) where ( z ) z ρ = f 0 z or ρ ( z ) ( 1)z = f z<0. Ths problem s solved usng lnear programmng methods. Standard errors for the vector of coeffcents are obtanable by usng a bootstrap procedure. In ths study 300 replcatons were carred out. 4. Results In table we show OLS returns to educaton as well as condtonal returns at 5 representatve quantles n the 1 Portuguese ndustres. Dfferences between percentles of the wage dstrbuton computed for 4 dfferent extremes taken by twos (90-10 and 75-5) are also reported. Followng Martns (004), we test the relevance of the unobserved worker qualty hypothess by comparng the dfferences n returns across hgh and low-wage ndustres and evaluatng the correlaton between OLS returns and both QR coeffcents and nterquantle dfferences. The ntuton s that for the unobserved ablty explanaton to be relevant, hgh wage ndustres should also show a large dfference n returns between the top of the wage dstrbuton, where hgh ablty workers are expected to be found, and ts bottom, where low ablty employees are lkely to be. From the results, a hgh dsperson across ndustres clearly emerges. The hghest OLS sectoral coeffcent (health and socal work) s almost 3 tmes hgher than the 3

5 lowest (Other communty, socal and personal servce actvtes, Prvate households wth employed persons, Extra-terrtoral organzatons and bodes). Tab.. Condtonal returns to schoolng - OLS and QR - and sgnfcance tests a+b c+d+e f g H j k l m n o+p+q OLS (0.080) (0.000) (0.000) (0.000) (0.000) (0.000) (0.007) (0.000) (0.000) (0.000) (0.000) (0.03) = (0.013) (0.003) (0.014) (0.073) (0.3) (0.186) (0.340) (0.170) (0.005) (0.000) (0.10) (0.470) = (0.001) (0.00) (0.000) (0.03) (0.41) (0.089) (0.108) (0.009) (0.000) (0.000) (0.000) (0.066) = (0.130) (0.000) (0.000) (0.000) (0.000) (0.015) (0.000) (0.000) (0.000) (0.000) (0.000) (0.031) = (0.194) (0.000) (0.000) (0.000) (0.000) (0.001) (0.03) (0.000) (0.000) (0.000) (0.003) = (0.318) (0.000) (0.000) (0.001) (0.000) (0.000) (0.138) (0.09) (0.000) (0.041) (0.000) (0.936) (0.614) (0.000) (0.031) (0.05) (0.05) (0.036) (0.37) (0.95) (0.154) (0.049) (0.161) (0.606) (0.407) (0.01) (0.008) (0.64) (0.148) (0.09) (0.0) (0.570) (0.90) (0.47) (0.55) (0.84) All eq. (0.68) (0.000) (0.001) (0.146) (0.008) (0.016) (0.000) (0.453) (0.001) (0.386) (0.311) (0.88) Note. Data are from cross sectonal UDB SILC 007 verson 1 of March 009. P-values n brackets. Bootstrap st. errors are obtaned wth 300 replcatons By comparng OLS and QR coeffcents, t can be noted that the ndustry wth the hghest (lowest) value n terms of OLS s not the ndustry wth the hghest (lowest) spread between the top and the bottom of the dstrbuton, both for the and 75-5 dfferences. We fnd that the nterquantle dfferences between the extremes of the dstrbuton are not bgger for the ndustres wth hgh OLS returns compared to the ndustres wth low OLS returns. Wth regard to the spread, results evdence that the average dfference between the 6 ndustres wth hgher OLS returns and ther 6 counterparts wth lower estmated OLS coeffcents s tghter and only equal to Usng the same OLS rankng of ndustres, such gap s found to be even negatve for the 75-5 spread. For the unobserved heterogenety to be a crtcal element for wage prema determnaton, we would expect a really bgger dfferental between the top of the dstrbuton, where the hghest ablty workers are expected to be, and ts bottom. 5. Robustness check Further, we test whether gaps between quantle coeffcents estmated n our QR are statstcally sgnfcant. The test has been carred out wth respect to the spreads consdered n the artcle (90-10=0 and 75-5=0) and to all quantles. More 4

6 specfcally, p-values are obtaned through a bootstrapped varance-covarance matrx that ncludes between quantle blocks. The results ndcate that n most cases the lnear hypothess (95-5=0 and 75-5=0) are found to be not sgnfcant. As expected, sgnfcance decreases when the nterquantle spread also decreases. We also fnd that even the jont equalty of coeffcents at all quantles s not rejected n many cases. Moreover, whle the OLS returns are well correlated wth almost all the QR returns (table 3), both n terms of Pearson and Spearman s correlatons, they are not correlated wth the dfference between the top and the bottom of the dstrbuton. The Pearson s correlaton coeffcent between OLS and the 75-5 quantle dfference s even negatve. Tab. 3. Correlaton between OLS and QR coeffcents Pearson Spearman = = = = = Conclusons In ths artcle we have appled OLS and QR technques to the last 007 EU-SILC wave n order to clear up a possble puzzlng presence of nter-ndustry nequalty wage prema for full-tme male workers n Portugal. We have found hgh dsperson of OLS returns amongst the 1 consdered sectors of the Portuguese economy, but a weak correlaton between OLS and the magntude of quantle benchmarkng dfferences (95-5 and 75-5). Furthermore, we have demonstrated that f sectors are ranked by OLS coeffcents and dvded n groups (hgh and low returns), the nter-quantle dfference s small (and for the dfference 75-5 s even negatve). Tests on the lnear hypothess 95-5=0 and 75-5=0 are found to be not sgnfcant whle OLS are well correlated wth almost all the QR coeffcents but not wth the dfference between the top and the bottom of the dstrbuton. Our results show that n Portugal, unobserved heterogenety possbly generated by the qualty of workers s stll rrelevant n the wage determnaton, despte reforms of the educatonal system durng the 1990s, amed at mprovng the qualty of ndvdual sklls and favorng a stronger lnk wth the job market. Therefore, the evdence suggests that the effect of these reforms on the wage premum of human captal, seems to have not come yet, whle other factors such as the relatve strength of ndustres n a small country may play a more mportant role. 5

7 References Budra, S. (010) Economc Inequalty n Portugal: A Pcture n the Begnnngs of the 1st century, Journal of Income Dstrbuton, 19 (), Gbbons, R. and L. Katz (199) Does Unmeasured Ablty Explan Inter-Industry Wage Dfferentals?, Revew of Economc Studes, 59, Hartog, J., Perera, P.T., and J.C. Vera (000) Inter-ndustry wage dsperson n Portugal: hgh but fallng, Emprca, 7, Koenker, R. and G. Bassett (1978) Regresson quantles, Econometrca, 46, Krueger, A. and L. Summers (1988) Effcency Wages and the Inter-Industry Wage Structure, Econometrca 56, Martns P. (004) Industry Wage Dsperson: Evdence from the Wage Dstrbuton, Economcs Letters, 83(), OECD (010) Economc Polcy Reforms: Gong for Growth. Pars: OECD. 6