Decomposition of changes in Hong Kong wage dispersion since 1980s : a distributional approach

  • Kai Wai HUANG

Student thesis: MPhil Thesis (Lingnan)


Wage dispersion is one of the social and economic issues arousing public concern in Hong Kong. There are many studies exploring the possible causes and changes in wage dispersion. They often focus on the study of summary measures such as Gini and Theil indexes, or adopt OLS-based regression approach. In foreign studies on wage dispersion, Oaxaca-Blinder decomposition, originated from Oaxaca (1974) and Blinder (1973), is a common method of decomposing changes or differences in mean wages between two groups into wage structure effect and composition effect, and then further decomposing the two effects into contributions of each control variable. Nevertheless, focusing on summary measures or decomposing mean wages can just give people an insight into the causes and changes in general wage dispersion but not the entire wage distribution. As pointed out by Chi, Li and Yu (2007), the estimation of the entire wage distribution and decomposition of the distributional changes in wage dispersion has been attracting the attention of labour economists. This thesis adopts a distributional approach proposed by Firpo, Fortin and Lemieux (2007) to study the changes in wage dispersion of Hong Kong since 1980s. The FFL approach comprises a two-stage procedure. Firstly, changes in dispersion are divided into wage structure effect and composition effect without directly estimating a wage-setting model. This is done by doing a proper reweighting to obtain counterfactual wage vectors. Kernel density estimation is used for visualizing the wage distribution in different years and the counterfactuals; secondly, novel recentered influence function (RIF) regressions across quantiles are performed to further decompose the two effects into contributions of each control variable. The findings are outlined as follows: first, there was an increase in wage dispersion over the whole wage distribution from 1980s but a decrease from 2001 to 2006; second, the composition effect dominates the wage structure effect over years; third, changes in the distribution of characteristics and the returns to these characteristics are highly responsive to each other, suggesting that our labour market is highly responsive to structural changes; fourth, The common wage-determining factors may not be able to explain the earnings-profile of low wage earners well. In brief, the development of the economy since 1980s increased the wage dispersion over years. Nevertheless, the economic downturn due to external shocks and internal unfavourable events and general skill-upgrading in labour-intensive industries decreased the wage dispersion since 2000s.
Date of Award2009
Original languageEnglish
Awarding Institution
  • Department of Economics
SupervisorLok-sang HO (Supervisor) & Xiangdong WEI (Supervisor)

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