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Does Unmeasured Ability Explain Inter-Industry Wage Differentials?

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  • Robert Gibbons
  • Lawrence F. Katz

Abstract

This paper provides empirical assessments of the two leading explanations of measured inter-industry wage differentials: (1) true wage differentials exist across industries, and (2) the measured differentials simply reflect unmeasured differences in workers' productive abilities. First, we summarize the existing evidence on the unmeasured-ability explanation, which is based on first-differenced regressions using patched Current Population Survey (CPS) data. We argue that these existing approaches implicitly hypothesize that unmeasured productive ability is equally rewarded in all industries. Second, we construct a simple model in which unmeasured ability in not equally valued in all industries; instead, there is matching. This model illustrates two endogeneity problems inherent in the first-differenced regressions using CPS data: whether a worker changes jobs in endogenous, as is the industry of the new job the worker finds. Third, we propose two new empirical approaches designed to minimize these endogeneity problems. We implement these procedures on a sample that allows us to approximate the experiment of exogenous job loss: a sample of workers displaced by plant closings. We conclude from our findings using this sample that neither of the contending explanations fits the evidence without recourse to awkward modifications, but that a modified version of the true-industry-effects explanation fits more easily than does any existing version of the unmeasured-ability explanation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3182.

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Date of creation: Nov 1989
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Publication status: published as Review of Economic Studies, Vol. 59, pp. 515-535, (July 1992).
Handle: RePEc:nbr:nberwo:3182

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  1. Nickell, S. & Wadhwani, S., 1989. "Insider Forces And Wage Determination," Papers 334, London School of Economics - Centre for Labour Economics.
  2. Jovanovic, Boyan & Moffitt, Robert, 1990. "An Estimate of a Sectoral Model of Labor Mobility," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 827-52, August.
  3. Solon, Gary, 1988. "Self-selection bias in longitudinal estimation of wage gaps," Economics Letters, Elsevier, vol. 28(3), pages 285-290.
  4. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Working Papers 1906, National Bureau of Economic Research, Inc.
  5. Richard B. Freeman, 1983. "Longitudinal Analyses of the Effects of Trade Unions," NBER Working Papers 1207, National Bureau of Economic Research, Inc.
  6. Heckman, James J & Sedlacek, Guilherme, 1985. "Heterogeneity, Aggregation, and Market Wage Functions: An Empirical Model of Self-selection in the Labor Market," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1077-1125, December.
  7. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  8. Addison, John T & Portugal, Pedro, 1989. "Job Displacement, Relative Wage Changes, and Duration of Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 7(3), pages 281-302, July.
  9. Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
  10. Bull, Clive & Jovanovic, Boyan, 1988. "Mismatch versus Derived-Demand Shift as Causes of Labour Mobility," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 169-75, January.
  11. Brown, Charles, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 113-34, February.
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