Wage Differentials Among Workers: An Empirical Analysis of the Manufacturing and Service Sectors

Abstract

The paper examines the existence of wage differentials and attempts to enquire into the factors determining such differentials in the manufacturing and service sectors of Haryana state. It highlights the relative importance of worker-specific factors and firm-specific factors in explaining wage differentials in the labour market using a semi-logarithmic regression model. Worker-specific factors such as education, work experience, gender and marital status explain around half of the variation in the wage level of workers, whereas firm-specific factors such as nature, size, type and location of the enterprise are able to explain only a small proportion of variation in the wage level, ranging from 17% in the manufacturing sector to 12% in the service sector. This study pinpoints the relative importance of worker-specific factors over firm-specific factors in determining the wage level of workers. Empirical evidence highlights that a significant proportion of the unexplained part in the variation of wages can be attributed to the employer- or firm-specific factors/variables. Thus, this study highlights the importance of human capital in raising the income level of workers and brings out the fact that the quality of human capital is not only important to narrow wage differentials but also helpful in raising the wage level of workers, which is a proxy of standard of living and is the ultimate objective of development.