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Inter-Industry Wage Differences and Theories of Wage Determination

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  • William T. Dickens
  • Lawrence F. Katz

Abstract

Numerous studies have shown large differences in wages for apparently similar workers across industries. These findings pose a challenge to standard model s of labor market behavior. A problem with past studies of industry wage differences is that they have failed to distinguish between union and nonunion workers. Many economists may expect union workers wages to be set in a noncompetitive fashion but would be surprised if nonunion wages were. We examine the differences in wages across industries for both union and nonunion workers. We find that even after controlling for a wide range of personal characteristics and geographic location large wage differences persist for both union and nonunion workers. Furthermore the premiums of union and nonunion workers are highly correlated. We review past studies which demonstrate that industry wage premiums are also highly correlated across countries and have been very similar over many decades. We present new evidence that the wages of different occupations are highly correlated across industries -- that is if any occupation in an industry is highly paid all occupations are. We also review the evidence which suggests that people who move from low to high paying industries receive a large fraction of the industry wage premium and that those who move from high to low paying industries lose the premium. Finally, we review the evidence on the correlates of industry wage differences. Quit rates, human capital variables, capital labor ratios and market power measures are all positively correlated with industry wage differences individually though the data are not adequate to determine their independent contributions in multiple regression. On the basis of all the evidence we conclude that standard labor market clearing models can not easily explain all the facts. Several alternative models are discussed including efficiency wage and collective action threat mode1 s. These are found to be more consistent with the facts though some troubling problems remain.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2271.

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Date of creation: Jun 1987
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Handle: RePEc:nbr:nberwo:2271

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References

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  1. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  2. Jeremy I. Bulow & Lawrence H. Summers, 1985. "A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment," NBER Working Papers 1666, National Bureau of Economic Research, Inc.
  3. Pradeep Kumar, 1972. "Differentials in wage rates of unskilled labor in Canadian manufacturing industries," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 26(1), pages 631-645, October.
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  8. Henry S. Farber, 1983. "Right-to-Work Laws and the Extent of Unionization," NBER Working Papers 1136, National Bureau of Economic Research, Inc.
  9. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  10. Heywood, John S, 1986. "Labor Quality and the Concentration-Earnings Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 342-46, May.
  11. Pugel, Thomas A, 1980. "Profitability, Concentration and the Interindustry Variation in Wages," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 248-53, May.
  12. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
  13. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  14. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  15. Mellow, Wesley & Sider, Hal, 1983. "Accuracy of Response in Labor Market Surveys: Evidence and Implications," Journal of Labor Economics, University of Chicago Press, vol. 1(4), pages 331-44, October.
  16. William T. Dickens & Kevin Lang, 1985. "A Test of Dual Labor Market Theory," NBER Working Papers 1314, National Bureau of Economic Research, Inc.
  17. Farber, Henry S, 1984. "Right-to-Work Laws and the Extent of Unionization," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 319-52, July.
  18. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
  19. Piore, Michael J, 1973. "Fragments of a "Sociological" Theory of Wages," American Economic Review, American Economic Association, vol. 63(2), pages 377-84, May.
  20. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 147-71, April.
  21. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
  22. Freeman, Richard B, 1980. "The Exit-Voice Tradeoff in the Labor Market: Unionism, Job Tenure, Quits, and Separations," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 643-73, June.
  23. Joseph E. Stiglitz, 1984. "Theories of Wage Rigidity," NBER Working Papers 1442, National Bureau of Economic Research, Inc.
  24. William T. Dickens, 1986. "Wages, Employment and the Threat of Collective Action by Workers," NBER Working Papers 1856, National Bureau of Economic Research, Inc.
  25. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290 National Bureau of Economic Research, Inc.
  26. John E. Kwoka & Jr, 1983. "Monopoly, plant, and union effects on worker wages," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 36(2), pages 251-257, January.
  27. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  28. Rosen, Sherwin, 1969. "On the Interindustry Wage and Hours Structure," Journal of Political Economy, University of Chicago Press, vol. 77(2), pages 249-73, March/Apr.
  29. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
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