Workers or employers: who is shaping wage inequality in Portugal?

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. A profile of an economy undergoing modernisation, where rising labour market inequality signalled the lack of an adequate labour force, can be drawn. An upgrading of the quality of the labour force, accompanied by rising returns to skill and schooling and declining returns to age is detected, while firms shifted towards more flexible structures. The impact of institutions was twofold. Trade unions, claiming to follow an inequality-reduction strategy, were unable to offset the rise in the highest wages, as wage drift was used by employers to overcome the constraints imposed by collective bargaining; the minimum wage legislation and collective bargaining contributed to compress the bottom of the wage distribution.