Relative wages for unskilled workers have declined over the past two decades. From 1980 to 1995, for example, pay for manual workers in the UK fell by 15% relative to their non-manual counterparts. In explaining this phenomenon, much of the recent US literature has stressed demand-side factors, notably the effects of increased global trade (which keeps domestic unskilled wages competitive with those in developing countries) and biased technical progress (especially the introduction of computers favouring skilled labour and displacing unskilled labour). Institutional changes, including the decline of unionization, which tended to compact wage structures, have also been considered.

In Discussion Paper No. 1490, Research Fellow Jonathan Haskel tests these arguments against UK manufacturing data for 1980–89. He also includes a number of hitherto untested factors, such as the rise of small firms and the increasing use of contractors for unskilled work. These latter effects, together with the fall in unionization, were found to account for up to half of the divergence in wages, with computerization accounting for the remainder. In contrast, the much touted global trade effects proved insignificant.

Small Firms, Contracting-out, Computers and Wage Inequality; Evidence from UK Manufacturing
Jonathan Haskel