Persistent inter‐industry wage differences: rent sharing and opportunity costs

John M Abowd,Kevin L Mckinney,Francis Kramarz,Paul Lengermann,Sébastien Roux

doi:10.1186/2193-8997-1-7

Abstract

Abstract Abstract We reconsider the potential for explaining inter‐industry wage differences by decomposing those differences into parts due to individual and employer heterogeneity, respectively. Using longitudinally linked employer‐employee data, we estimate the model for the United States and France. The part arising from individual heterogeneity can be theoretically and empirically related to the worker’s opportunity wage rate. The part arising from employer heterogeneity can similarly be related to product market quasi‐rents and relative bargaining power. We find that these two variables are highly correlated with both parts of the differential in France. Although the U.S. inter‐industry wage differentials are strongly correlated with those in France, the decomposition is more nuanced in the American data, where the opportunity wage rate and the product market conditions are related to both the personal and employer heterogeneity. JEL codes J31, J50, L10

Highlights

One of the most pervasive and difficult to explain phenomena in economics is the persistence of inter-industry wage differences for measurably similar workers
Dickens and Katz (1987) tried to explain the inter-industry wage differentials using a variety of measured individual and firm characteristics aggregated to the industry level; their analysis was very much in the spirit we propose but they could not control for the unmeasured differences that we stress below
8 Conclusion We have specified and examined a model of long-term interindustry wage differences that decomposes the measure into a part due to unobservable individual heterogeneity and a part due to employer heterogeneity

Summary

Introduction

One of the most pervasive and difficult to explain phenomena in economics is the persistence of inter-industry wage differences for measurably similar workers. This topic received a flurry of attention in the 1980s, Krueger and Summers (1987) and Krueger and Summers (1988) established the consistency of these differentials over time and across countries, the fundamental question remained unresolved: are these differentials due to individual or employer components? The second of these articles, AFK, analyzes data from the State of Washington and finds that inter-industry wage differentials are due in equal proportions to individual and employer heterogeneity while firm-size wage differentials are due primarily to firm heterogeneity Both AKM and AFK used statistical approximations to estimate the decomposition of wage differentials into individual and employer components.

A simple economic model

Comparison of institutions

Findings

Conclusion