Cross-national trends in permanent earnings inequality and earnings instability in Europe 1994-2001
Denisa Maria Sologon & Cathal O'Donoghue
#2012-006
Using a fully harmonized panel dataset across 14 European countries
between the early- 1990s and 2001, the European Community Household
Panel, we fill a gap in the literature with a cross-national comparative
study which explores the trends in persistent inequality and transitory
inequality across countries belonging to a common economic area, but
with different systems and with different rates of adaptation to the
economic reality of the 1990s. The covariance structure of earnings is
estimated using minimum distance methods. We find a substantial degree
of convergence in the overall inequality among the Mediterranean, the
Continental and the Anglo-Saxon countries, which reflects a convergence
in both permanent and transitory inequality. Among the
Nordic/Flexicurity countries we find a strong divergence in the overall
inequality, driven by a divergence in both permanent and transitory
inequality. Pooling most countries in Europe, we find evidence of a
strong convergence in earnings instability. The Nordic/Flexicurity
countries have a lower overall inequality, a lower persistent inequality
and a higher earnings mobility. These cross-national differences in
persistent inequality and earnings instability across Europe can be
partly explained by the labour market policies and institutions linked
with the wage-setting mechanism. The stricter the regulation in the
labour and product market, the higher the persistent inequality. The
higher the unionization, the degree of corporatism, and the tax wedge
the lower persistent inequality. Corporatist systems are associated with
a lower earnings instability than decentralized ones.
Keywords: earnings dynamics; permanent inequality; transitory inequality
JEL classification codes: C23; D31; J31