Determinants of Household Earnings Inequality: The Role of Labour Market Trends and Changing Household Structure

Luxembourg Income Study (LIS) Working Paper Series No. 591 by Wen-Hao Chen, Michael Förster and Ana Llena-Nozal (Social Policy Division, OECD) published June 2013

Abstract

This article assesses various underlying driving factors for the evolution of household earnings inequality for 23 OECD countries from the mid-1980s to the mid-2000s.

There are a number of factors at play.

Some are related to labour market trends – increasing dispersion of individual wages and changes in men’s and women’s employment rates. Others relate to shifts in household structures and family formation – more single-headed households and increased earnings correlation among partners in couples. The contribution of each of these factors is estimated using a semi parametric decomposition technique.

The results reveal that marital sorting and household structure changes contributed, albeit moderately, to increasing household earnings inequality, while rising women’s employment exerted a sizable equalising effect.

However, changes in labour market factors, in particular increases in men’s earnings disparities, were identified as the main driver of household earnings inequality, contributing between one-third and one-half to the overall increase in most countries. Sensitivity analysis applying a reversed-order decomposition suggests that these results are robust.

JEL classification: D31, J12, J22, I30

Full text (PDF 41pp)

---