IAREG 2

1. Regional heterogeneity in wage distributions. Evidence from SpainElisabet MotellónEnrique López-BazoMayssun El-AttarAQR – IREA, UOC, EUI

2. ASSUMPTIONS • Regional differentials in productivity and thus in wages are the result of different endowment of characteristics and of regional heterogeneity in their price/return. • Important role of regional endowment of HK and of differences in the return that workers obtain from investments in HK. • OBJECTIVES • General • To prove that regional heterogeneity in the return to HK is the major responsible of wage differentials across regions. • Specifics • To assess the magnitude of regional gaps in nominal and real wages • To decompose the regional wage gap into the contribution of endowments and prices of worker and firm characteristics • To measure the contribution of HK, both endowment and return, on regional wage disparities Intangible assets & regional economic growth Intangible assets & regional economic growth IAREG2

3. DATABASE Wage Structure Survey for Spain (INE & EUROSTAT): - matched employer-employee dataset  micro-data on wages and worker and firm characteristics - includes workers in establishments of at least 10 employees Spatial units: Spanish NUTS II regions  17 Comunidades Autónomas Two groups: Low wage regions vs High wage regions Periods: 1995 & 2002 Main variables: - gross hourly wage (raw wage + complements) in October - HK  years of schooling, tenure, experience Intangible assets & regional economic growth Intangible assets & regional economic growth IAREG3

4. METHODOLOGY • Wage gap decomposition for the entire distribution, and assessment of role of HK • Steps: • 1. Mincerian equations for high-wage (HW) and low-wage (LW) regions • 2. Estimation of counterfactual wagesfor the LW, with wage structure (prices) of HW • 3. Counterfactual wages for LW with returns to human capital of HW • 4. Comparison of actual and counterfactual wage distributions •  Effect of differences in return to HK on regional disparities in wage distributions Intangible assets & regional economic growth Intangible assets & regional economic growth IAREG4

5. MAIN RESULTS • Differences in regional wages not only in the first moment of the wage distribution, but also in its dispersion and shape. • Minor role for compensating differentials (cost of living ) and structural variation (endowment of characteristics) • Differences in regional wage distributions mostly explained by regional heterogeneity in returns (particularly in 2002) • Outstanding role of returns to human capital, with no effect of returns to job and firm characteristics. • Effects are not homogeneous along the wage distribution. Affect the mean, dispersion and shape Intangible assets & regional economic growth Intangible assets & regional economic growth IAREG5

6. GENERAL CONCLUSION Regional convergence in worker (HK) and job and firm characteristics  non effective to reduce regional wage gaps as they are mostly caused by heterogeneity in returns (particularly to HK).  Homogenization of regional wage distributions can only be achieved by convergence in (private) returns to human capital Intangible assets & regional economic growth Intangible assets & regional economic growth IAREG6