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Rent-Sharing and the Cyclicality of Wage Differentials

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Author Info
Philip Du Caju (National Bank of Belgium, Brussels.)
François Rycx () (DULBEA, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and NBB and IZA-Bonn.)
Ilan Tojerow () (DULBEA, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and NBB and IZA-Bonn.)

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Abstract

This paper investigates inter-industry wage differentials in Belgium, taking advantage of access to a unique matched employer-employee data set covering all the years from 1999 to 2005. Findings show the existence of large wage differentials among workers with the same observed characteristics and working conditions, employed in different sectors. These differentials are persistent and no particular downward or upward trend is observed. However, the dispersion of inter-industry wage differentials appears to show a cyclical pattern over time. Further results indicate that ceteris paribus, workers earn significantly higher wages when employed in more profitable firms. The time dimension of our matched employer-employee data allows us to instrument firms' profitability by its lagged value. The instrumented elasticity between wages and profits is found to be quite stable over time and varies between 0.034 and 0.043. It follows that Lester’s range of pay due to rent sharing fluctuates between about 24 and 37 percent of the mean wage. This rent-sharing phenomenon accounts for a large fraction of the industry wage differentials. We find indeed that the magnitude, dispersion and significance of industry wage differentials decreases sharply when controlling for profits.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp08035.pdf
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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 08-035.RS.

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Length: 69 pages
Date of creation: Nov 2008
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Handle: RePEc:sol:wpaper:08-035

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Related research
Keywords: Industry wage differentials; Rent-sharing; Matched employer-employee data;

Other versions of this item:

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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