Recent Changes in British Wage Inequality: Evidence from Firms and Occupations

Abstract

Using a linked employer-employee dataset, we present new evidence on the role of firms in British wage inequality trends over the past two decades. The extent of differences between firms in the average wages they paid did not drive these trends. Between 1996 and 2005, greater wage variance within firms accounted for eighty-six percent of the total increase in wage variance among British employees. In the following decade, wage inequality between firms continued to increase, whereas overall wage dispersion fell. These British data contain detailed descriptions of employee occupations. Approximately all of the contribution to inequality dynamics from estimated firm-specific factors, throughout the employee wage distribution, disappears after we account for the changing occupational content of wages. The modestly increasing trend in between-firm wage inequality can be explained by a combination of changes to between-occupation inequality and the occupational composition of firms and employment. These results are robust to using weekly, hourly or annual measures of pay.

Keywords: wage inequality, within-firm inequality, occupational wage premiums

JEL Classification: D22, E24, J31