Workers or Employers: Who is Shaping Wage Inequality?

An extensive micro data set matching firms, establishments and their employees, is used to study the determinants of earnings inequality in Portugal and its evolution from 1983 to 1992, with the Theil index, its decomposition, and the decomposition of its change as tools of analysis. The relevance of both worker and employer attributes in shaping earnings inequality and its trend is quantified. The impact of the firm on wage inequality in a European country is compared to the situation in the USA, and the results suggest that a more regulated and centralized European bargaining system might reduce the scope for firm action. A profile of an economy undergoing modernization, where rising labour market inequality signalled the lack of an adequate labour force, can be drawn, with the minimum wage having nonetheless a certain narrowing effect on the earnings distribution.