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Individual Heterogeneity and Interindustry Wage Differentials

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  • Michael P. Keane

Abstract

Estimates of interindustry wage differentials are obtained using a fixed-effects estimator on a long panel, the National Longitudinal Survey of Young Men (NLS). After controlling for observable worker characteristics, 84 percent of the residual variance of log wages across industries is explained by individual fixed-effects. Only 16 percent of the residual variance is "explained" by industry dummies. Since no controls for specific job characteristics are used, job characteristics that vary across industries could potentially explain this rather small residual across-industry log wage variance that is not attributable to individual effects. Clearly, then, these data do not force us to resort to non-competitive explanations of interindustry wage differentials, such as efficiency wage theory. Furthermore, efficiency wage theories predict that wages in efficiency wage paying (or primary) industries should be relatively rigid. Therefore, industry wage differentials should widen in recessions. However, no such tendency is found in the data.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Journal of Human Resources.

Volume (Year): 28 (1993)
Issue (Month): 1 ()
Pages: 134-161

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Handle: RePEc:uwp:jhriss:v:28:y:1993:i:1:p:134-161

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Web page: http://jhr.uwpress.org/

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  1. Duncan, Greg J. & Holmlund, Bertil, 1983. "Was Adam Smith Right, After All? Another Test of the Theory of Compensating Wage Differentials," Working Paper Series, Research Institute of Industrial Economics 93, Research Institute of Industrial Economics.
  2. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 259-93, March.
  3. Wachter, Michael L, 1970. "Cyclical Variation in the Interindustry Wage Structure," American Economic Review, American Economic Association, American Economic Association, vol. 60(1), pages 75-84, March.
  4. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, Elsevier, vol. 1(1), pages 79-82.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  6. Stiglitz, Joseph E, 1985. "Equilibrium Wage Distribution," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(379), pages 595-618, September.
  7. Richard B. Freeman, 1983. "Longitudinal Analyses of the Effects of Trade Unions," NBER Working Papers 1207, National Bureau of Economic Research, Inc.
  8. Lang, Kevin & Kahn, Shulamit, 1990. "Efficiency Wage Models of Unemployment: A Second View," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 28(2), pages 296-306, April.
  9. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(5), pages 823-38, Supp..
  10. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc.
  11. Breusch, Trevor S & Mizon, Grayham E & Schmidt, Peter, 1989. "Efficient Estimation Using Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 57(3), pages 695-700, May.
  12. Keane, Michael & Moffitt, Robert & Runkle, David, 1988. "Real Wages over the Business Cycle: Estimating the Impact of Heterogeneity with Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(6), pages 1232-66, December.
  13. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  14. Robert E. Hall, 1975. "The Rigidity of Wages and the Persistence of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 301-350.
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