Abstract

Motivated by the debate regarding the social value of high-paying “good” jobs versus low-paying “bad” jobs, this paper examines the eects of changes in industrial composition on wage determination. The paper presents a search and bargaining model to highlight channels through which a change in industrial composition can have spillover eects on wages in non-directly aected sectors even when total labor demand remains unchanged. The model incorporates elements from the heterogeneous firm literature in order to address long run issues associated with firm selection. Using US Census data over the period 1970-2000, we examine whether such spill-over eects are present at the city level. The main finding of the paper is that a change in industrial composition away from bad jobs and toward good jobs has very substantial spillovers on within sector wages implying that the commonly used decomposition for evaluating the eects of changes in industrial composition on average wages severely underestimates those eects. In contrast to the impact of changes in industrial composition, we find that changes in city-level labor demand holding industrial composition constant has very minor eects on wages. We interpret these finding as indicating that a bargaining model of wages appears relevant even in highly decentralized markets, and that industrial composition is an important component of worker bargaining power.

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