AQR-Lab researchers: “Inequality increase is a common phenomenon in Europe”
Jordi Suriñach, Raül Ramos, Vicente Royuela and Enrique López Bazo are researchers in the Laboratory of Applied Economics Transfer (AQR-Lab) of the University of Barcelona. AQR-Lab is a laboratory of knowledge transfer composed by more than thirty academics in the field of applied economics, which provide services to both public administrations and private firms. The research group has elaborated, together with Christian Dreger, expert in the German Institute for Economic Research (DIW), in Berlin, the report Wage dispersion in the EU. The document analyses the evolution of wage inequality in the twenty-six European Union member countries between 2006 and 2011. The European Parliament has recently published the report, which is based on the European Union Statistics on Income and Living Conditions and the Structure of Earnings Survey. We speak with the members of the research group about report conclusions, which illustrate wage inequality in Europe.
Jordi Suriñach, Raül Ramos, Vicente Royuela and Enrique López Bazo are researchers in the Laboratory of Applied Economics Transfer (AQR-Lab) of the University of Barcelona. AQR-Lab is a laboratory of knowledge transfer composed by more than thirty academics in the field of applied economics, which provide services to both public administrations and private firms. The research group has elaborated, together with Christian Dreger, expert in the German Institute for Economic Research (DIW), in Berlin, the report Wage dispersion in the EU. The document analyses the evolution of wage inequality in the twenty-six European Union member countries between 2006 and 2011. The European Parliament has recently published the report, which is based on the European Union Statistics on Income and Living Conditions and the Structure of Earnings Survey. We speak with the members of the research group about report conclusions, which illustrate wage inequality in Europe.
Among the main results of the study, it is important to emphasize that inequality has increased in two thirds of EU member states between 2006 and 2011. Is there any other common trend?
Enrique López Bazo (EL): This is one of the most interesting conclusions of the report because wage inequality is taking place in developed European economies (Denmark, United Kingdom, Austria, France and even in Northern countries) and in less developed economies (Bulgaria and Latvia). It proves that inequality increase is a common phenomenon, although in each country the situation is different due to its particular characteristics and circumstances, for instance its welfare system and the institutional framework of its labour market. Therefore, phenomena like globalization and the impact of technological changes on the labour market are having a generalized impact that suits the particular circumstances of each economy. Moreover, the report reveals that wage inequality decreased slightly in some EU countries. In this case, there is certain homogeneity because, except for Luxembourg and Italy, they are all little developed economies.
Why is Spain one of the countries in which income inequality has increased most?
Raül Ramos (RR): The main reason is that crisis has had a strong impact on job destruction. In fact, in Spain, job destruction is the main cause of wage inequality increase. However, and this is not something analysed by the study but it has been suggested by other recent studies, when an unemployed person finds a new job, it is usually a part-time job, so wage is substantially lower than the one he/she perceived in his/her previous job. In fact, salaries represent 60% of income.
EL: Moreover, the number of part-time contracts has increased for the last years. Therefore, even if wage per worked hour was the same in full-time and part-time jobs, differences in total number of worked hours results in an increase of income inequality between these two types of workers.
VR: In any case, it is important to remember that job destruction has mainly affected low added value jobs. Therefore, we have experienced a curious phenomenon: inequality of worked hour wage and the proportion of low-paying jobs have decreased with economic crisis.
The study also points out that purchasing power has decreased. Is this aspect important in Spanish situation? And is it relevant in order to analyse the situation faced by citizens?
RR: Without any doubt, the loss of purchasing power —consequence of wage decrease— has a clear impact on familiesʼ consumption capacity and, therefore, it slows down economic recovery. In addition, those families who can maintain a certain level of consumption —because they have preserved their job positions— are afraid of lossing their job and prefer to save money. Until a substantial improve of the labour market will take place, an increase of exports is the only factor that can improve economy.
VR: Nevertheless, prices are also going down; economists name it deflation. In view of a wage freeze, price decrease increases purchasing power, but it can include additional risks, like an increase of debt.
The effects of economic adjustments
It is surprising that income inequality has decreased in countries like Portugal and Greece, which have been particularly affected by crisis. How do you explain that?
RR: Precisely, this is one of the effects of austerity measures and wage devaluation carried out in these two countries. It has been such a big adjustment that it has affected, to a great or less extent, every worker, but more severely those who had high wages, so differences have been reduced.
EF: Moreover, recession and adjustment processes in these countries have get out of the market weak workers, for instance those with a lower level of qualification who perceived lower salaries. Expulsion resulted in a compression of wage distribution, and thus inequality decrease.
What is the result of the study that has surprised you most?
RR: If we consider results from the opposite perspective, the most surprising result is that, despite crisis, inequality has decreased in a third part of member states.
EL: However, as we have just said, inequality decrease cannot be assessed in a positive way because it is not the consequence of low salary increases. On the contrary, it is due to cuts in wages perceived by workers and a high rate of job loss. Here is the challenge faced by European economy in general and the countries which are in a particular vulnerable situation: they must be able to get out of the crisis by creating high quality job positions. Therefore, the commitment to high added value activities, innovation and training is crucial.
VR: Another surprising aspect is that minimum wages have been revalorised in relation to the whole of salaries because general wage level has been reduced and minimum wages have been maintained.
Not so low salaries for less-skilled workers
The study underlines the influence of globalization and technological change on inequality. Can you give us an example? To what extent is the influence of these two factors important in the case of Spanish economy?
EL: Without any doubt, they are two key phenomena to understand the evolution of inequality in general, and wage inequality in particular. Among other things, globalization makes companies reflect about their production process at the international level. For instance, they choose the place to locate their production plants. This gives them a scope for action that strengthens their position in job condition negotiation. But, in addition, companies located, for example in Spain, compete with other companies that produce in places where labour costs are much lower, and this limits so much their scope for action. In view of this situation, if a Spanish firm cannot compete by increasing its productivity, it only has another option: to cut wages.
On the other hand, technological innovation favours skilled workers as they are able to take advantage of innovation (innovation and skills are complementary). Technology usually substitutes everyday tasks done by less-skilled workers. This leads to a wage increase for skilled-workers and a wage reduction for less-skilled ones, so wage inequality increases. In fact, the study points out technological advances are replacing workers who perform everyday tasks and perceive average wages. As a consequence, wage distribution polarization happens (workers with high salaries and workers with low salaries).
What measures have you identify in egalitarian countries? Is it possible to implement any of them in Spain?
RR: The study highlights the importance of the minimum wage as well as the manner in which collective bargaining fixes salaries. In countries where minimum wage is set, inequality is minor. The role of collective bargaining is not so clear, but in countries with centralised structures inequality increases. Finally, in countries where trade unions play an important role, inequality is lower.
VR: However, many of these measures, for instance setting a high minimum wage, can be counterproductive as they may slow job creation. Many studies identify investment in education as a key factor to increase employment and reduce wage inequality.
This is the second study you elaborate for the European Parliament. How do these works influence policy definition?
Jordi Suriñach: Both works have been presented to members of the European Parliament. They ask for these studies in order to have a well-founded opinion and be able to take political measures. So, they are not decisive studies, but they assist the process.
To be exact, the first study advised the European Parliament to analyse macro-economic predictions used by countries by comparing them with the ones made by the European Commission. It also analysed the role that national parliaments play in programme design and countriesʼ ability to fulfil country-specific recommendations set by national reform and stability programmes.
This type of studies, which are also commissioned by the directorates general of the European Commission, are much more specific than research programmes like Horizon 2020 or the Seventh Framework Programme, which have a long-term application. However, Horizon 2020 draws special attention to immediate impact.