Declining returns to skill and the distribution of wages : Spain 1995-2006

In contrast to the pattern observed in other developed countries, Spanish wage inequality did not increase during the period from 1995-2006. In this paper we analyse the relative role of supply and demand factors when accounting for this “atypical” fact. Because noticeable changes in both labour supply and labour demand - such as educational upgrading of the labour force, huge immigration flows, and a boom in the construction sector - took place during these years, we start by decomposing observed wage changes into changes in the composition of the labour force and changes in the prices of workers’ and jobs’ characteristics. The results indicate that the compression of the wage distribution is largely explained by a decrease in the returns to education. We also provide some evidence of the relative impact of labour supply and labour demand factors on the changes of these returns, showing that both the increase in the supply of high-skilled workers and the increasing weight of low-skilled occupations are related to the decreasing trend in the skill premium over this period.The first author aknowledges research funding from the Spanish Ministry of Science and Innovation, Grant No. ECO2009-1116