The evolution of inequality in productivity and wages: panel data evidence

There has been a remarkable increase in wage inequality in the United States, UK, and many other countries over the past three decades. A significant part of this appears to be within observable groups (such as experience-gender-skill cells). A generally untested implication of many theories rationalizing the growth of within-group inequality is that firm-level productivity dispersion should also have increased. We utilize a UK firm-level panel dataset covering the manufacturing and non-manufacturing sectors since the early 1980s. We find evidence that productivity inequality has increased. Existing studies have typically underestimated this phenomenon because they focus only on the manufacturing sector where inequality has risen much less and which has shrunk rapidly. Most of the increase in individual wage inequality can be accounted for by an increase in inequality between firms (and within industries). Increased productivity dispersion appears to be linked with new technologies as suggested by models such as Caselli (1999, Am. Econ. Rev., 89, 78-102) and is not primarily due to an increase in transitory shocks, greater sorting or entry/exit dynamics.