Abstract
Using the 1968, 1981, and 2000 Swedish Level of Living Surveys, the authors examine the evolution of the wage distribution in Sweden over the periods 1968–1981 and 1981–2000. The first period was the heyday of the Swedish solidarity wage policy with strong equalization clauses in the central wage agreements. During the second period, there was more flexibility for firms to adjust wages to reflect conditions such as labor shortages in particular fields. The authors find a remarkable narrowing of the wage distribution in the first period, but in the second period, wages grew more equally across the distribution. The authors decompose these changes in wages across the distribution into two components–those due to changes in the distribution of characteristics such as education and experience and those due to changes in the distribution of returns to those characteristics. They find that the wage compression between 1968 and 1981 was driven by changes in the distribution of returns, but between 1981 and 2000, the change in the distribution of returns had less of an effect on wage compression.
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