Wage inequality on the rise: The role of workers’ characteristics

Abstract

Wage inequality has been the main driver of the rise in income inequality around the world in the last decades. The leading explanation has been the increasing returns to human capital, usually attributed to changing technology and globalization. This paper studies the rise in wage inequality in a small open economy. In contrast with popular explanations, our results highlight a strong and gradual inequalizing effect of changes in workers’ characteristics such as increased schooling and age, decline of public sector employment and contraction of employment in manufacturing in favor of services.