Labor Market Institutions and Skill Premiums: An Empirical Analysis on the UK, 1972-2002

Abstract

This paper analyzes the links between labor market institutions and skill premiums in the UK. We focus on the effect of deunionization on rising skill premiums during the 1980s and 1990s. We find that the deunionization of unskilled workers can explain about 25 percent of the dramatic increase of the degree premium in the private sector. While the degree premium in the public sector increases less than that in the private sector, the deunionization of unskilled workers is also the main drive behind it. However, the deunionization of skilled workers has no significant effect on skill premiums. Neither do taxation and unemployment benefits. We also find evidence that casts doubts on the conventional argument of skill-biased technology change (SBTC) and industrial restructuring on earnings inequality. Our results reveal the specific importance of unskilled workers' unionization in the problem of increasing wage inequality.

Keywords:

• institutional economics
• panel data
• skill premiums
• trade union