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Session10 Lueven .pdf

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“Explaining International Differences in Male Skill Wage
Differentials by Differences in Demand and Supply of Skill”
Leuven, E., H. Oosterbeek, and H. Van Ophem (2004)
Economic Journal, 114(495), pp. 466-486.
Lisa van Duijn (i6137212)
Wage inequality between skill groups can differ a lot across countries. This paper
investigates the differences in male skill wage differentials, using the supply and
demand framework of Katz & Murphy (1992). Moreover, it compares its research to
previous researches of Blau & Kahn and Devroye & Freeman.
The difference between this paper and the others is that the other papers ignore the
fact that prices depend on net supply conditions.
This paper uses the IALS data set, which uses 3 scales to measure literacy levels:
prose, document and quantitative literacy.

Figure 1 demonstrates the difference between years of schooling and the IALS score.
It is important to note that even if the USA has the most years schooling, it did not
end up highest on the IALS score.

In order to examine differences in wage inequality between skill groups across
countries, the paper uses the framework of demand and supply. According to this
framework, an increase in relative net supply should come with a decrease in relative
wages. Consequently, the regression line should have a negative slope. To test this
hypothesis, the paper uses the following regression equation1:

1. SBK
Blau & Kahn’s paper states that the findings of their research are not consistent with
the predictions of the supply & demand framework. A larger net supply should
result in a lower relative wage. However, Blau & Kahn found the opposite.
Figure 2 displays the regression output using the analysis of Blau & Kahn with IALS
data. These results are not significant, as already stated by Blau and Kahn. It is
almost as random as a random distribution.

Figure 3 replaces SBK with SIALS. The results are remarkably different than figure 2. It
shows a significant relation between net supply and the relative wages. Thus, the

Appendix 1

research of Blau & Kahn could be biased, since their research uses a different skill

3. Robustness
According to Devroye & Freeman, IALS data may not be a correct measurement of
skill among immigrants. However, this assumption cannot be found in the
regressions2. In fact, SBK might overestimate migrants’ skill level. Generally, legal
migrants are high skilled.
The paper concludes the differences in skill wage differentials across countries are
consistent with the framework of demand and supply. Thus, the opposite of Blau &
Kahn. The paper argues that years of schooling combined with experience is an
inappropriate measurement for comparisons across countries. IALS would be a
better measurement.
However, it is important to keep in mind that IALS is still quite basic. For example,
social skills are not taken into account. Likewise, fundamental skills also have
influence on the wage differential, but are not included in the research.


Appendix 2

Appendix 1 – derivation of the regression equation
Firstly, the relative demand index is calculated according to the following formula:

Following, the supply index for skill group k in country y is the following equation. It
shows the relative share of the skill group in the work force of country y relative to
the baseline country.
Combining both indexes results in the net supply index:
Lastly, the wage differential will be plotted against the net supply index, resulting in
the final equation:
Appendix 2 – Wage Regressions US for Migrants and Non-migrants

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