Scandinavian Working Papers in Economics

Working Paper Series, Center for Labor Studies,
Uppsala University, Department of Economics

No 2013:12: Permanent versus Transitory Wage Differentials and the Inequality-Hours Hypothesis

Magnus Gustavsson ()
Additional contact information
Magnus Gustavsson: Uppsala Center for Labor Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper disentangles the effect of inequality in permanent and transitory wages on hours worked by, first, estimating the two components for Swedish industries and, second, using the resulting estimates as explanatory variables in an hours-worked equation. Consistent with Bell and Freeman’s (2001) inequality-hours hypothesis, permanent wage differentials are found to have a positive effect on individuals’ hours of work while transitory wage differentials have no effect. However, the analysis also shows that, in estimated hours-worked equations, inequality in observed wages is potentially a good approximation for inequality in permanent wages.

Keywords: labor supply; wage dispersion; wage dynamics

JEL-codes: J22; J31

11 pages, October 15, 2013

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