Applied Economics Letters

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Did wage inequality increase in Portugal? Yes, and

for good reasons

João Manuel Pereira

To cite this article: João Manuel Pereira (2020): Did wage inequality increase in Portugal? Yes,
and for good reasons, Applied Economics Letters, DOI: 10.1080/13504851.2020.1789057

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APPLIED ECONOMICS LETTERS
https://doi.org/10.1080/13504851.2020.1789057
ARTICLE
Did wage inequality increase in Portugal? Yes, and for good reasons
João Manuel Pereira
Department of Economics and CEFAGE-UE, University of Évora, Évora, Portugal
ABSTRACT
As in Anglo-Saxon countries, wage inequality increased in Portugal from the beginning of the
1980s to the end of the 2000s. Using data from a matched employer-employee data set and
reweighting methods, we show that the increased wage inequality in Portugal is fundamentally
explained by compositional changes in the employment structure related to the modernization of
the labour market.
I. Introduction
Wage inequality started rising in the early 1980s,
mainly in Anglo-Saxon countries such as the
United States, Canada and the UK. In continental
European countries (France and Germany, etc.) and
Japan inequality also increased but less. The con-
sensus that emerged from the economic literature
was that economic shocks arising from globalization
and technological change had increased the relative
demand for skilled workers and, consequently, wage
inequality (Lemieux 2008). However, as labour mar-
kets of Anglo-Saxon countries are more exposed to
market mechanisms than those of continental
European countries, inequality increased more in
the former group of countries than in the latter.
Portugal also experienced an increase in wage
inequality, comparable to those of the Anglo-Saxon
countries (Cardoso 1998), which continued at least
until the end of the 2000s (Centeno and Novo 2014).
However, the Portuguese labour market is very dif-
ferent from those of Anglo-Saxon countries. In fact,
the Portuguese labour market is highly regulated
and the wage bargaining process is centralized. So,
according to the consensus explanation, wage
inequality in Portugal should have followed the
trend of continental European countries and not
that of Anglo-Saxon countries. In that sense, the
analysis of the evolution of wage inequality in
Portugal is very different from that of other coun-
tries, as it combines elements of continental
European countries and of Anglo-Saxon countries.
CONTACT João Manuel Pereira jpereira@uevora.pt Department of Economics and CEFAGE-UE, University of Évora, Évora 7000-803, Portugal
© 2020 Informa UK Limited, trading as Taylor & Francis Group
KEYWORDS
Inequality; reweighting;
wages; wage distribution
JEL CLASSIFICATION
J00; J31; D63
Previous studies pointed out several explanations
for the increase in wage inequality in Portugal,
namely, skill-biased technological change (Cardoso
1998), increasing and unequal returns to education
over the wage distribution (Machado and Mata
2005), changes in the employment structure, mini-
mum wages and employment polarization (Centeno
and Novo 2014).
Most previous studies cover a short or medium-
term period of time, with no long-term perspective
of the causes of the inequality change in Portugal,
about 40 years after it started rising. This time
period is long enough for labour demand and sup-
ply to adjust to economic shocks (technological
change, globalization, institutional changes) and
for a long-term explanation for the emergence of
increased wage inequality. Therefore, the aim of
this article is to provide a long-term view of the
causes of the increased wage inequality in Portugal.
Our findings suggest that the upward movement of
wage inequality is fundamentally explained by
compositional changes in the Portuguese employ-
ment structure, such as those linked to workers’
educational level and average age and the increased
share of women in employment.
II. Data and econometric methods
We use data from Quadros de Pessoal, a matched
employer-employee data set. This is a mandatory
census undertaken by the Portuguese Ministry of
Employment, which includes information on the
2 J. M. PEREIRA

characteristics of workers, firms and establish- increased. Finally, there was also an increased share
ments in the private sector in Portugal. This is of females in employment, which is in accordance
a widely used data set for research about the with the international trend (Olivetti and
Portuguese labour market (Card et al. 2018). Petrongolo 2016).
Table 1 displays the evolution of wage inequality To analyse the evolution of wage inequality we
in Portugal in the private sector over the period use several inequality indices (Gini, the Theil and
1985–2017 based on hourly wages computed from log wage gap differences) and the reweighting
the raw data. Overall inequality increased from approach of DiNardo, Fortin, and Lemieux
1985 to the middle/end of the 2000s and decreased (1996). By using this approach, we can divide the
after that (Gini, Theil, 90/10). However, the evolu- change in inequality into two parts, one explained
tion of wage inequality was not uniform over the by the changing prices of workers’ characteristics
wage distribution. In fact, from 1985 to 1995, (price effect) and the other explained by changes in
inequality increased both at the bottom (50/10) the employment composition (composition effect).
and at the top (90/50) of the wage distribution, That division is implemented by carrying out
but more strongly at the top. After the mid- a counterfactual exercise that combines the char-
nineties, it started decreasing at the bottom of the acteristics of workers from some period t* with the
wage distribution, but continued increasing at the returns of these characteristics in another period
top. This trend ended at the middle/end of the t. The reweighting factor (w) that allows such coun-
2000s, when wage inequality also started decreasing terfactual exercise to be implemented is given by:
at the top of the wage distribution.
PrÖT à t⇤ jxÜ 1 PrÖT à t⇤ Ü
In parallel with these changes in wage inequality, wà ⇥ (1)
the Portuguese labour market underwent an in- 1 PrÖT à t⇤ jxÜ PrÖT à t⇤ Ü
depth transformation in terms of workforce com- PrÖT à t⇤ jxÜ is the probability of a worker with
position from 1985 to 2017 (Table 2). First, the characteristics x being observed in year t*;
average level of education of Portuguese workers PrÖT à t⇤ Ü and (1-PrÖT à t⇤ Ü) are the sample pro-
increased greatly. Second, the average age level also portions of the years t* and t, respectively. We
estimate PrÖT à t⇤ jxÜ with a logit model using
a similar set of covariates as in Lemieux (2006),
Table 1. Wage inequality ratios and indexes in Portugal, gross
hourly earnings, 1985–2017.
namely, the education and age dummies present in
1985 1995 2000 2005 2007 2010 2015 2017 Table 2 and all possible interaction terms between
Gini 0.30 0.36 0.35 0.36 0.35 0.34 0.33 0.32 them; in addition, we also use tenure and tenure
Theil 0.16 0.25 0.25 0.27 0.26 0.25 0.24 0.23 squared, five dummies identifying the kind of col-
90/10 3.48 4.21 3.96 4.06 3.97 3.73 3.51 3.26
90/50 2.29 2.66 2.61 2.64 2.59 2.58 2.50 2.42 lective agreement according to which wages are set
50/10 1.52 1.58 1.52 1.53 1.53 1.44 1.40 1.35
(including no collective agreement) and seven
Source: author computations based on Quadros de Pessoal, several years. The
wage inequality ratios and indices were computed with the absolute value dummies controlling for workers’ skill level. The
of nominal hourly earnings. dependent variable is a dummy for 1985 pooling
data for 1985 and 2017.
Table 2. Means of selected variables, Portugal, 1985–2017.
1985 2007 2017
III. Results
Education (Lower secondary) 0.14 0.22 0.26
Education (Upper secondary) 0.05 0.21 0.29
Education (University degree) 0.03 0.13 0.21
Table 3 displays the change of a set of inequality
Age (16–25 years) 0.17 0.11 0.08 measures between 1985 and 2017. In line (1), we
Age (26–35 years) 0.34 0.34 0.25
Age (36–45 years) 0.25 0.29 0.32 display the change computed with the raw data. This
Age (46–55 years) 0.17 0.20 0.24 change simultaneously measures the effect of chan-
Age(≥ 56 years) 0.07 0.07 0.11
Female 0.03 0.43 0.46 ging prices and quantities of workers’ observed and
Sample size 1,294,006 2,354,460 2,320,057 unobserved characteristics. However, if we apply the
Source: idem Table 1. Note: these means represent the share of each reweighting factor (1) to the 2017 data, we obtain
characteristic in the private sector employment in Portugal, given the
selected sample. the inequality change that would be observed if the
 APPLIED ECONOMICS LETTERS 3

Table 3. Wage inequality change in Portugal 1985–2017, hourly earnings (log).

90–10 90–50 50–10 Gini Theil
(1)Δ overall inequality −0.066*** (0.002) 0.054*** (0.001) −0.121*** (0.001) 0.023*** (0.001) 0.065*** (0.003)
(2) Δ overall inequality, x’s 1985 −0.382*** (0.002) −0.170*** (0.002) −0.212*** (0.001) −0.043*** (0.002) 0.018** (0.008)
(3) Δ overall inequality, x’s 2017 −0.324*** (0.003) −0.002 (0.003) −0.323*** (0.002) −0.019*** (0.001) 0.032*** (0.003)
(4) Δ Predicted inequality 0.069*** (0.002) 0.074*** (0.002) −0.005*** (0.001) 0.004*** (0.000) −0.001*** (0.000)
(5) Δ Predicted inequality, x’s 1985 −0.267*** (0.003) −0.189*** (0.003) −0.081*** (0.002) −0.061*** (0.001) −0.035*** (0.000)
(6) Δ Predicted inequality, x’s 2017 −0.153*** (0.004) 0.088*** (0.003) −0.241*** (0.003) −0.017*** (0.001) −0.001 (0.001)
(7) Δ Residual inequality −0.000 (0.001) −0.019*** (0.001) 0.018*** (0.001) ... ... . . . . . ..
(8) Δ Residual inequality, x’s 1985 −0.122*** (0.002) −0.074*** (0.001) −0.048*** (0.001) . . . . . .. . . . . . ..
(9) Δ Residual inequality, x’s 2017 −0.223*** (0.003) −0.110*** (0.002) −0.112*** (0.002) . . . . . .. . . . . . ..
Source: idem Table 1. Notes: bootstrapped standard errors (100 reps.) are in parentheses. (***), (**), (*) significant at 1%, 5% and 10% significance level,
respectively.

level of workers’ characteristics was that of 1985
(line 2); in line 3, we compute the inequality change
that would be observed if the level of workers’ char-
acteristics in 1985 was that of 2017. The inequality
change computed in lines (2) and (3) is explained by
the changing prices of workers’ observed and unob-
served characteristics (price effect) in different
employment structures. The part of the inequality
change explained by changing the level of workers’
characteristics (composition effect) is the difference
between line (1) and line (2) or line (3), according to
the employment structure that is adopted.
Likewise, in lines (4) to (6) similar estimates are
displayed, but for the predicted inequality change
based on regression models for the log of hourly earn-
ings explained by the same set of covariates as the logit
model applied to estimate the reweighting factor, w.
Predicted inequality evaluates the part of inequality
explained by workers’ observed characteristics and
their prices. Finally, in lines (7) to (9), residual
inequality (hourly wages predicted hourlywagesÜ,
or the inequality within groups, is analysed. To access
the statistical significance of the estimated changes,
bootstrapped standard errors were also estimated.
Except in the case of the 90–10 difference, the other
inequality indices (Gini and Theil) indicate that wage
inequality increased in Portugal from 1985 to 2017.
That increase is fundamentally explained by changes
in the upper part (90–50) of the wage distribution, as
in the lower part (50–10) inequality decreased. The
joint effect of observed characteristics and prices on
the change in inequality is, in general, positive,
excluding the lower tail of the wage distribution and
the Theil’s index (Table 3, line 4). The changes in the
residual wage inequality are not significant, as the
changes in the lower and upper part of the wage
distribution cancel each other out (7).
If workers’ characteristics were fixed at the 1985
level and, therefore, we evaluate the effect on
inequality of changing returns to workers’ observed
and unobserved characteristics (lines: 2, 5 and 8),
inequality would have decreased considerably
(except the Theil’s index). So the price effect is nega-
tive and what pushed up wage inequality in Portugal
was the positive composition effect linked to the
changes in the employment structure (Table 2).
If, instead, the 2017 employment structure is
adopted (lines 3, 6 and 9), the general picture is
not very different. Indeed, the 90–10 difference and
the Gini index continue to indicate that inequality
would have decreased, but the Theil index goes in
the opposite direction for overall inequality. This is
not a surprising finding as both indices weight
different parts of the wage distribution differently.
So, in general, we have negative price effects and
positive composition effects, both for observed and
unobserved workers’ characteristics. The positive com-
position effects on observed characteristics are directly
related to the changes in the employment structure of
the Portuguese economy. Indirectly, these changes may
have also given rise to positive composition effects on
unobserved characteristics as their dispersion typically
increases with age and education (Lemieux 2006). As
regards the negative price effects on the observed char-
acteristics, several studies show that the returns to
education have been decreasing since the middle of
the nineties (Campos and Reis 2019); there is also
evidence that the returns to age had decreased from
1985 to 1995 (Machado and Mata 2005).
To better understand the dynamics of the
inequality change in Portugal from 1985 to 2017,
we divided our analysis into two periods: the first
from 1985 to 2007 and the second from 2007 to
2017. 2007 is the year that precedes the beginning
of the greatest impacts of the last financial crisis; it
4 J. M. PEREIRA

Table 4. Wage inequality change in Portugal 1985–2007, hourly earnings (log).

90–10 90–50 50–10 Gini Theil
(1)Δ overall inequality 0.132*** (0.002) 0.122*** (0.002) 0.009*** (0.001) 0.058*** (0.000) 0.096*** (0.001)
(2) Δ overall inequality, x’s 1985 −0.021*** (0.002) 0.014*** (0.002) −0.035*** (0.001) 0.017*** (0.000) 0.042*** (0.002)
(3) Δ overall inequality, x’s 2007 −0.030*** (0.002) 0.055*** (0.002) −0.085*** (0.001) 0.027*** (0.001) 0.069*** (0.001)
(4) Δ Predicted inequality 0.174*** (0.002) 0.140*** (0.002) 0.034*** (0.001) 0.036*** (0.000) 0.033*** (0.000)
(5) Δ Predicted inequality, x’s 1985 0.006*** (0.002) 0.012*** (0.002) −0.006*** (0.001) 0.005*** (0.000) 0.013*** (0.000)
(6) Δ Predicted inequality, x’s 2007 0.010*** (0.003) 0.076 (0.003) −0.067*** (0.002) 0.017*** (0.001) 0.029*** (0.001)
(7) Δ Residual inequality 0.102*** (0.001) 0.025*** (0.001) 0.077*** (0.001) ... ... . . . . . ..
(8) Δ Residual inequality, x’s 1985 0.028*** (0.001) −0.012*** (0.001) 0.040*** (0.001) . . . . . .. . . . . . ..
(9) Δ Residual inequality, x’s 2007 −0.028*** (0.002) −0.038*** (0.002) 0.010*** (0.001) . . . . . .. . . . . . ..
Source: idem Table 1. Notes: bootstrapped standard errors (100 reps.) are in parentheses. (***), (**), (*) significant at 1%, 5% and 10% significance level,
respectively.

Table 5. Wage inequality change in Portugal 2007–2017, hourly earnings (log).

90–10 90–50 50–10 Gini Theil
(1)Δ overall inequality −0.199*** (0.001) −0.068*** (0.001) −0.131*** (0.001) −0.036*** (0.001) −0.031*** (0.003)
(2) Δ overall inequality, x’s 2007 −0.390*** (0.001) −0.198*** (0.001) −0.193*** (0.001) −0.072*** (0.001) −0.053*** (0.004)
(3) Δ overall inequality, x’s 2017 −0.364*** (0.001) −0.163*** (0.002) −0.201*** (0.001) −0.067*** (0.001) −0.063*** (0.003)
(4) Δ Predicted inequality −0.105*** (0.002) −0.067*** (0.002) −0.038*** (0.001) −0.033*** (0.000) −0.034*** (0.000)
(5) Δ Predicted inequality, x’s 2007 −0.275*** (0.002) −0.188*** (0.001) −0.086*** (0.001) −0.066*** (0.000) −0.053*** (0.000)
(6) Δ Predicted inequality, x’s 2017 −0.269*** (0.002) −0.161*** (0.002) −0.107*** (0.001) −0.062*** (0.000) −0.053*** (0.000)
(7) Δ Residual inequality −0.102*** (0.001) −0.044*** (0.001) −0.058*** (0.001) ... ... . . . . . ..
(8) Δ Residual inequality, x’s 2007 −0.183*** (0.001) −0.085*** (0.001) −0.098*** (0.001) . . . . . .. . . . . . ..
(9) Δ Residual inequality, x’s 2017 −0.185*** (0.001) −0.083*** (0.001) −0.101*** (0.001) . . . . . .. . . . . . ..
Source: idem Table 1. Notes: bootstrapped standard errors (100 reps.) are in parentheses. (***), (**), (*) significant at 1%, 5% and 10% significance level,
respectively

is also the end of a period of growth and the start of
a period of macroeconomic adjustment and labour
market liberalizing reforms in Portugal (Távora
and González 2016). That analysis is presented in
Tables 4 and 5 and was carried out in a similar way
as that displayed in Table 3.
It is evident from the analysis of both tables that
the reduction of the price of observed and unob-
served characteristics had started in the first period;
it is also clear that this movement speeded up after
2007, with the economic crisis and with the labour
market reforms. Finally, the positive composition
effects are present along the entire period, so they
are a long-term trend and not an episodic event.
in general, decreased over the period and this move-
ment speeded up after 2007. Hence, the increase in
wage inequality in Portugal occurred fundamentally
due to the modernization of the labour market and
not to increasing wage differentials either between or
within groups of workers.
Data availability statement
The data used in this research were obtained from INE
(Institituto Nacional de Estatística) under an agreement
between the Ministry of Science and Technology of Portugal
and INE. Further information on how to access these data can
be found at: http://www.dgeec.mec.pt/np4/46/

Disclosure statement
IV. Concluding remarks
I declare that there are no conflicts of interest involved in this
This article shows that the increased wage inequality research.
in Portugal since the middle of the 1980s is funda-
mentally explained by the changes in the structure of
employment, such as the increased educational level Funding
and the average age of the employed and the This paper is financed by National Funds of the FCT –
increased share of women in employment. The Portuguese Foundation for Science and Technology
returns to observed and unobserved characteristics, [«UIDB/04007/2020»].

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