Wage Inequality in the United Kingdom: A Microeconometric Analysis

This thesis is an econometric investigation of wage inequality in the UK. It consists of three pieces of empirical work using large UK micro-datasets. The datasets used include the individual level New Earnings Survey (NES), Annual Survey of Hours and Earnings (ASHE), and the Labour Force Survey (LFS). Use is also made of firm level data from the Annual Respondents Database (ARD). The first piece of empirical work aims to identify trends in the UK wage distribution over time at the aggregate level and at the level of population sub-groups. This analysis is performed by fitting parametric distributions to annual cross sections of data using maximum likelihood estimation. The second piece of analysis is an investigation into the driving factors behind the change in the distribution of wages over this period using the LFS. This is analysed using a human capital framework and a decomposition analysis, dividing changes in wage inequality into price, quantity, and residual effects. The final empirical investigation contributes to the literature investigating the relationship between wage inequality and firm performance. Using matched employer/employee data, a Cobb-Douglas production function with a wage inequality term is used to estimate the relationship between the performance of enterprises and wage inequality. Overall, the findings in this thesis show that the finance sector stands out sharply in the UK as a high inequality industry both in levels and in growth. Despite a slow-down compared to the 1980’s, wage inequality has continued to grow. Human capital effects have played a role in the changes in wage inequality but a more sophisticated model is needed to more fully explain these changes at the within-group level. There is only weak evidence of a link between inequality and corporate performance overall. Results for manufacturing are, however, consistent with earlier work.