Inter-industry Wage Differentials Research Articles

Inter-Industry Wage Differentials in China: Evidence from a Correlated Random Effect Model

Inter-Industry Wage Differentials in China: Evidence from a Correlated Random Effect Model

Wage Differentials in the Post Liberalized Labor Market in Paksitan

ABSTRACT: In this paper, we investigate the wage differentials that exist in the post-liberalized labor market in Pakistan. The increasing wage differential contradicts standard labor theories and models. The literature also confirms the existence of wage differentials across different labor markets both in industrialized and non-industrialized countries. The firms compensate the workers both on their observable and unobservable characteristics. The mincer equation used in its semi-logarithmic decomposed form to derive wage differentials. The weighted adjusted standard deviation technique is used for further decomposition of the level and regional variations in sectoral wage gaps, as suggested by Horrace and Oaxaca. The sectoral heterogeneity, skill characteristics and regional dispersions derived by using the micro labor force data sets spread over thirty years. The results confirm the existence of inter-industry wage differentials. However, the size varies across the regions, levels of education, and types of occupations. A substantial difference in the wage gap observed in firms both in the formal and informal sectors. The financial services firms pay higher than the average national wage followed by firms in utility services, the services sector, and the mining sector. The firms in the agricultural sector pay lower than the average national wage. The dispersion in wages has risen to the magnitude of almost 25 percent over the last three decades. Firms pay higher wages to high-skill workers, while industries requiring jobs with low skills pay lower wages. The wage differentials in various regions are attributable to the persistent and relative backwardness of provinces. The high-skilled occupations in general are likely to have more benefits than those involving low-skilled workers. Individual and household characteristics account for almost 50 percent of variation regardless of the sectoral affiliation. The increase in the minimum wage, with targeted social policies in educational attainment, increased participation of women, and provision of social services in the informal sector may reduce the gap in wage difference.

Inter-industry Wage Differentials in Pakistan

The essential feature of a perfectly competitive labour market is that workers who accept jobs can expect to receive compensation equal to their opportunity cost. Firms pay a wage which is just sufficient enough, to attract workers of the quality they desire and no higher [Krueger and Summers (1988)]. Overall, the markets do not follow the law of one price, contradicting the competitive framework. This is where the problem of wage differentials across different industries needs to be assessed, and has also been the focus of many studies over the years, mainly in the industrialised countries, e.g. USA, European Countries. However, the issue of wage differentials has been addressed by very few studies in the developing countries [Arbache (2001) and Erdil, et al. (2001)]. Wage differentials analysis in developing countries should also have equal importance as in the industrialised countries, in order to gauge the effect of the corporate culture and centralisation/decentralisation on the different industries and labour market of those developing countries.

The interindustry wage differentials by sector in China: What is the role of union density?

Although how union density affects interindustry wage differentials has long been discussed, there is a paucity of empirical research relevant to China. The trade-union system in China has been criticized for a long time because the Chinese Communist Party can influence union density and indirectly affect interindustry wage differentials through non-market mechanisms, such as administrative monopolies. This study explores the impact of union density on interindustry wage differentials in the context of administrative monopolies. The research takes a two-stage estimation approach after scrupulously integrating and conforming more than 40,000 individual data from the Urban Household Survey and various yearbooks from years 2004, 2008, and 2013. In the first stage, the individual wages are regressed with industry-sector dummies to obtain the wage-differential coefficients. Furthermore, union density is considered as a core variable to create regressions to the interindustry wage differential coefficients obtained in the first stage using administrative monopolies and labor safeguards as instrumental variables. It is found that although the union density was expected to increase wage differentials in industries, its influence diminished in 3 years under study. Administrative monopolies can indirectly affect wage differentials through union density. The support to grassroots unions in non-administrative monopolies industries and the opening up of industry to the private sector will help to overcome this dilemma.

Inter-industry wage inequality: persistent differences and turbulent equalisation

AbstractThe empirical stylised fact of persistent inter-industry wage differentials is an enduring challenge to economic theory. This paper applies the classical theory of ‘real competition’ to the turbulent dynamics of these inter-industrial wage differentials. Theoretically, we argue that competitive wage determination can be decomposed into equalising, dispersing and turbulently equalising factors. Empirically, we show graphically and econometrically for 31 US industries in 1987–2016 that wage differentials, like regulating profit rates, are governed by turbulent equalisation. Furthermore, we apply a fixed-effects OLS as well as a hierarchical Bayesian inference model and find that the link between regulating profit rates and wage differentials is positive, significant and robust.

Interindustry wage differentials, technology adoption, and job polarization

Based on observations that high-wage industries in 1980 experienced more evident job polarization between 1980 and 2009, we hypothesize that the persistent structure of interindustry wage differentials leads to heterogeneity in job polarization across industries; as the relative price of ICT capital declines, firms respond to exogenous wage differentials by replacing routine workers with capital. Our empirical analysis shows that, during the last three decades, the annualized growth rate of ICT capital per worker increased by 0.34 percent and that of routine employment decreased by 0.41 percent in the U.S. industries that paid 10 percent higher wages in 1980.

Decomposing the structure of wages into firm and worker effects

PurposeThe purpose of this paper is to show that for some key topics on labour economics such as the effect of seniority and job mobility in wages, it is important to explicitly consider firm fixed effects. The author also wants to test whether the importance of firm in explaining wage dispersion is higher or lower in Spain than in other European countries.Design/methodology/approachThe author estimates an individual wage equation where firm and workers effects are considered and the estimation process control for censored wages. This exercise is performed for the Spanish economy over the course of a whole business cycle, i.e., 2000-2015.FindingsThe author demonstrates that Spanish firms contribute to explain around 27 per cent of the individual wage heterogeneity but more importantly around 74 per cent of inter-industry wage differentials. In both cases, this contribution is mainly related to large dispersion in firm’s wage policies. The process of positive sorting of workers across firms or industries does not play an important role. Interestingly, the importance of firm’s wage policies in explaining individual wage dispersion has increased over the current Big Recession.Practical implicationsThe results confirm that firms set wages and, henceforth, are partially responsible for individual wage heterogeneity but more importantly for inter-industrial wage dispersion.Originality/valueThe exercise is performed under optimal conditions because the author uses a longitudinal matched employer-employee data set, observed wages are at a monthly frequency, and implements an estimation method suitable for censored models with two high-dimensional fixed effects. This is the first study that looks deeply into the role of firms in explaining wage heterogeneity at the individual and industry level in Spain and along the current Big Recession.

Interindustry Wage Differentials, Technology Adoption, and Job Polarization

Based on observations that high-wage industries in 1980 experienced more evident job polarization between 1980 and 2009, we hypothesize that the persistent structure of interindustry wage differentials leads to heterogeneity in job polarization across industries; as the relative price of ICT capital declines, firms respond to exogenous wage differentials by replacing routine workers with capital. Our empirical analysis shows that, during the last three decades, the annualized growth rate of ICT capital per worker increased by 0.34 percent and that of routine employment decreased by 0.41 percent in the U.S. industries that paid 10 percent higher wages in 1980.

Inter-Industry Wage Differentials in Greece: Evidence from Quantile Regression Analysis

ABSTRACTUsing a consistent estimator of the covariance matrix of the asymptotic distribution of the quantile regression estimator with intra-cluster correlation of the error terms, the paper investigates whether and to what extent inter-industry wage differentials derive from worker heterogeneity in the form of unobserved quality. To conduct this study, we pioneer in utilizing a unique data set, the European Union Structure of Earnings Survey for Greece, which follows a two-stage random sampling approach of employees clustered within firms. Data refer to 2010 when the first elements of the economic adjustment programme to deal with the chronic deficiencies of the Greek economy and restore sustainable public finances, competitiveness and set the foundation for long-term growth, gained visibility. Results point to high wage dispersion across industries at the mean of the conditional wage distribution, even after controlling for personal and workplace characteristics. However, evidence for the unobserved heterogeneity hypothesis is rather scant. Therefore, there is room for efficiency wage or rent-sharing theories in accounting for a large part of inter-industry wage differentials tentatively implying that firm heterogeneity in the ability to pay matters more than employee unobservable attributes in the wage determination process.

Assignment reversals: Trade, skill allocation and wage inequality

The allocation of skilled labor across industries shapes inter-industry wage differences and wage inequality. This paper shows the ranking of industries by workforce skill differs between developed and developing countries and develops a multi-sector assignment model to understand the causes and consequences of this fact. Heterogeneous agents leverage their ability through their span of control over an homogeneous input. In equilibrium, higher skill agents sort into sectors where the cost per efficiency unit of input is lower. Consequently, skill allocation is endogenous to country-sector specific variation in input productivity and costs and when the ranking of sectors by effective input costs differs across countries there is an assignment reversal. Assignment reversals between North and South have novel implications for how trade affects wages because they imply the Stolper–Samuelson theorem does not hold. Instead, each country has a comparative advantage in its high skill sector and output trade integration causes the relative wage of high skill workers, and wage inequality within the high skill sector, to increase in both countries.

Inter-Industry Wage Differentials in Greece: Rent-Sharing and Unobserved Heterogeneity Hypotheses

This paper examines the structure and determinants of inter-industry wage differentials in Greece, along with the role of the rent-sharing and unobserved heterogeneity hypotheses, employing restricted least squares and quantile regression techniques with cluster robust standard errors at the firm level. To this end, a unique dataset, the European Union Structure of Earnings Survey (SES), is utilized. Data refer to 2010 when the first elements of the economic adjustment programme to deal with the chronic deficiencies of the Greek economy and restore sustainable public finances, competitiveness and set the foundation for long-term growth were beginning to be implemented. Results point to high wage dispersion across industries at the mean of the conditional wage distribution, even after controlling for personal and workplace characteristics. However, evidence for the unobserved heterogeneity hypothesis is rather scant. Therefore, there is room for efficiency wage or rent-sharing theories in accounting for a large part of inter-industry wage differentials tentatively implying that firm heterogeneity in the ability-to-pay matters more than employee unobservable attributes in the wage determination process.

The effect of trade and FDI on inter-industry wage differentials: The case of Mexico

Taking advantage of the liberalization process under NAFTA, this paper assesses the relative importance of the degree of trade openness and Foreign Direct Investment (FDI) in explaining inter-industry wage differentials for the case of Mexico. Using INEGI's National Survey of Urban Employment for the period 1994–2004, the empirical analysis is conducted on two stages. In the first stage, individual wages are regressed on worker characteristics, job and firm attributes, informality and a set of federal entity and industry indicators. In the second stage, inter-industry wage differentials (derived from the coefficient estimates of the industry indicators) are regressed on trade and FDI variables. The main findings show that trade openness does not have a statistically significant effect on inter-industry wage differentials, whereas for the case of FDI, a positive nonlinear relationship is found to exist.

Inter-industry wage differentials revisited: Wage volatility and the option value of mobility

Analysis of data from the PSID reveals that idiosyncratic wage volatility varies inversely with inter-industry wage differentials and is positively correlated with both returns to industry tenure and rates of inter-industry mobility. An incomplete markets life cycle model in which inter-industry mobility decisions and wage differentials are endogenously determined in equilibrium is then developed and shown to be capable of rationalizing these features of the data. In the model, the ability of worker to switch industries generates option value that is large enough to offset the standard risk premium that workers demand for exposure to excess wage volatility.

Jamaica: Employer size and worker remuneration in the private sector

Evidence suggests that labour markets do not clear as posited by conventional microeconomics. The enduring inter-industry wage differentials (iiwd) and employer-size wage differentials (eswd) present a challenge. Data from the Jamaican private sector reveal that eswd could be the impetus for iiwd. After accounting for labour quality and other characteristics, employers with 10 to 49 employees and 50 or more employees pay estimated premiums of 14.3% and 22.9%, respectively. After estimating the differences in tenure profiles, the premium associated with the largest employer size was reduced to 15.9%, while the premium associated with establishments of 10 to 49 workers was unchanged. Notwithstanding the partial explanation provided by tenure profile differences, the bulk of the eswd appears to be explained by other theoretical constructs.

Inter-Industry Wage Differentials Revisited: Premiums for Low Wage Volatility?

This paper explores the empirical and theoretical relationships between the level and variability of wages across industries. Using panel data, I find that idiosyncratic wage volatility varies inversely with inter-industry wage differentials. I then demonstrate that an incomplete markets life cycle model in which inter-industry mobility decisions and wage differentials are endogenously determined in equilibrium is capable of explaining this feature of the data. In the model, the ability to switch industries creates an option value that offsets the standard risk premium workers demand for exposure to excess wage volatility.

Unobserved Worker Quality and Inter-Industry Wage Differentials

This study quantitatively assesses two alternative explanations for inter-industry wage differentials: worker heterogeneity in the form of unobserved quality and firm heterogeneity in the form of the firm’s willingness to pay (WTP) for workers’ productive attributes. We develop an empirical model of labor demand and apply a two-stage nonparametric procedure to recover worker and firm heterogeneities. In the first stage we recover unmeasured worker quality by estimating a nonparametric hedonic wage function. In the second stage we infer each firm’s WTP parameters for worker attributes by using first-order conditions from the demand model. We apply our approach to quantify inter-industry wage differentials on the basis of individual data from NLSY79 and find that worker quality accounts for approximately two thirds of the inter-industry wage differentials.

Does Industry Affiliation Influence Wages? Evidence from Indonesia and the Asian Financial Crisis

We exploit panel data and large, abrupt, and unusual dislocations of Indonesian workers in the wake of the Asian Financial Crisis to investigate the robustness and persistence of inter-industry wage differentials (IWDs). Unobserved worker characteristics explain 36% of IWDs. IWDs persist through the post-crisis decade, although, consistent with a rent-sharing explanation, they shift alongside sectors’ terms of trade in the wake of the crisis. Agriculture pays a wage penalty, and manufacturing offers a statistically significant but small premium. Most IWDs do not seem to be driven by minimum wage laws, worker monitoring costs, the disagreeability of the work, job-specific skills, industry-specific human capital, nonwage benefits, or contracting terms.

Work and Labor in Slow-Progressive Sectors of the Economy

In the late 1960s, William Baumol demonstrated that structurally unbalanced growth, with the associated cost disease phenomenon, can be expected to have some very particular effects on work and labor in slow-progressive sectors of the economy: performing arts, health care, education, and law enforcement. Specifically, there will be downward pressure on the rate of growth of unit wages and upward pressure on the rate of growth of productivity in these sectors. In the long run, the effects of cost disease are potentially damaging for work and labor in some of the key human service occupations in the public sector. In this interdisciplinary paper, we put forward a simple model, which reconstructs and renews the model discovered by Baumol in 1967. Our model makes only a minor modification to Baumol’s original cost disease model, but the implications of this modification are noteworthy. They are also largely unexplored in empirical research. In this paper, we search for empirical traces of the effects of cost disease on work and labor. We use earlier economic and social scientific research literature on inter-industry wage differences and on time pressure, and we analyze differences in work orientations with the help of the ISSP Work Orientations III data set. Our empirical findings are early and rough intimations. However, they do give preliminary support to the propositions of the paper. The observed changes in employment, wages, and experienced time pressure all correspond to what we would expect on the basis of the cost disease hypothesis. The same applies to the observed differences in the structure of incentives across different occupational groups. The paper is not empirically conclusive, but we see it as a basis for interesting further research.

The importance of worker, firm and match effects in the formation of wages

This paper estimates a Mincerian wage equation with worker, firm, and match specific effects and thereby complements the growing empirical literature started by the seminal paper of Abowd (Econometrica 67:251–333, 1999b). The analysis takes advantage of the extensive Danish IDA data which provides wage information on the entire working population in a 27-year period. We find that the major part of wage dispersion in the Danish labor market can be explained by differences in worker characteristics. However, the relative contributions of the three components vary across subgroups of workers. The match effect constitutes a non-negligible part of the overall wage dispersion. An analysis of inter-industry wage differentials shows that firm characteristics are more important at the industry level than at the worker level. Similarly, we find evidence that high-wage workers tend to sort into high-wage industries to a larger extent than they sort into high-wage firms within industries. The mobility pattern of workers is related to the quality of the firm and the match. Finally, we find that firms’ wage policies differ across subgroups.

Trinidad and Tobago: Inter-industry wage differentials

Conventional labour economics argues that the typical firm is a wage taker and that wages are determined by the interaction of labour supply and the aggregate demand for labour. Under these conditions, markets clear, and non-frictional unemployment cannot feature in the long run. The persistently high levels of unemployment in the Caribbean present a significant challenge to this critical prediction of neoclassical economics. Efficiency wage theories argue that wages are endogenously determined by firms, which pick wage levels that minimize the average per unit cost of “efficiency labour”. Among the important conclusions of these theories is the possibility of persistent non-frictional unemployment. This paper presents evidence suggesting the existence of long-term inter-industry wage differentials in Trinidad and Tobago. This is a possible indication of the applicability of efficiency wage theories in explaining labour market phenomena in the twin-island Republic.