Returns to Skills and the Distribution of Wages: Spain 1995-2010

In contrast to the pattern observed in other developed countries, the Spanish wage distribution compressed between 1995 and 2006 and became more disperse afterwards, so that in 2010 wage inequality was roughly similar to 1995. In this paper, we analyze the role of supply and demand factors when accounting for these facts. We start by decomposing observed wage changes into changes in the composition of the labour force and changes in the returns of workers' and jobs' characteristics. The results indicate that the compression of the wage distribution between 1995 and 2006 is largely explained by changes in returns, and particularly, by a decrease in the returns to education. We show 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. In contrast, the widening of the wage distribution after 2006 is largely explained by an increase in the relative demand for high-skilled workers generating an increase in the school premium.