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DEPFID Working Paper 6/2007 - Abstract

Technological choices under
institutional constraints: measuring the impact on earnings dispersion

Elisabetta Croci Angelini and Francesco Farina

Also due to the competitive pressure of imports from the developing countries, a switch to labour-saving techniques has happened in most sectors of OECD countries in the last decades. The distribution of earnings levels has been significantly affected. Wage dispersion is strictly interwoven with employment rates across skill levels, as they are jointly determined by the trajectories followed by firms in choosing their productive techniques, as well as by labour market institutions providing insurance to risk averse workers against unemployment and low wages. We conduct empirical estimates on the technological patterns determined by restrictions placed by labour market regulation on the employers’ production decisions, which narrow the capacity of the firm to decide on the employment level and on the productive techniques combining high-skill and low-skill workers. Our investigation relies on: (i) an index of earning dispersion (for each country under scrutiny and for each sector the skill premium and the high-skill ratio), to disentangle the combined effect of earnings and employment percentages of high, intermediate, and low skill workers; (ii) a Theil decomposition, to analyse the trends in earnings and wage dispersion between-sectors and within-sectors and account for the evolution of wages and employment at the sectoral level. We show that
European firms, differently from the hypothesis put forward by Krugman (1994), do not stay passive in front of institutional constraints, but their technological choices are meant to combine productive strategies with labour market conditions.

Keywords: technology, institutions, earnings dispersion.

JEL Classification: E24; J31; O33.

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