A European Analysis of Changes in Gender Specific Wage Inequality Using Decomposition Methods

We analyze wage growth and changes in wage inequality in eleven European countries between 1994 and 2001. The data base used throughout is the User Data Base (UDB) of the European Community Household Panel (ECHP). The decomposition analysis is carried out independently for both genders. Following Juhn, Murphy and Brooks (1991; 1993) we split the current wage into components to isolate the forces underlying the wage change. While the decomposition method is in the spirit of the well known Oaxaca decomposition (1973), in the approach of Juhn, Murphy, and Pierce the residual of Mincerian-earnings equations is decomposed further into relative rank position and the effect of the residual distribution. We find wage inequality to be greater among men for most northern countries of the EU, while in southern countries, wage inequality is greater among women. Between 1994 and 2001, wage inequality was found to have moved in the same direction for men and women in all countries. Inequality increased in five countries, most pronouncedly in the Netherlands; inequality decreased in six countries, most markedly in Ireland. Decomposition of the changes in inequality into quality, price, and unobserved effects revealed that the quality effect explained only a minor part of the total change. Changes in prices for individual characteristics are found to be the most important source of inequality changes for women, and about as important as changes in residual effects are for men. Altogether, the heterogeneous development of wages across the European Union does not hint at a common trend toward the rising inequality that has been observed in the United States for decades.