Inter-industry Wage Differences and Individual Heterogeneity: How Competitive is Wage Setting in the UK?
AbstractThere are two findings that are conspicuous in almost all studies of individual wage determination. First, standard cross-section wage equations rarely account for more than half of the total variance in earnings between individuals. Second, there are large and persistent inter-industry wage differentials and these are frequently attributed to non-competitive forces in wage determination. This paper explores these two issues using cross-section, pooled and panel data drawn from the first six waves of the British Household Panel Survey. We show that much of the residual variation in wages can be explained by significant unobserved differences between workers, perhaps reflecting innate ability or other characteristics of individuals not captured by observed data. Moreover, our wage equations explain a substantial proportion of the variation in earnings between individuals in terms of their observed and unobserved characteristics, and we find only a small role for job characteristics and almost no role for industry affiliation once we allow for unobserved individual heterogeneity. One interpretation of our findings is that wages are determined principally by individual characteristics - as human capital theory presupposes - rather than by compensating differentials or by non-competitive factors.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Kent in its series Studies in Economics with number 9914.
Date of creation: Dec 1999
Date of revision:
Contact details of provider:
Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/
Find related papers by JEL classification:
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nickell, Stephen & Wadhwani, Sushil B, 1989.
"Insider Forces and Wage Determination,"
CEPR Discussion Papers
310, C.E.P.R. Discussion Papers.
- Nickell, S. & Wadhwani, S., 1989. "Insider Forces And Wage Determination," Papers 334, London School of Economics - Centre for Labour Economics.
- Nickell, S. & Wadhwani, S., 1989. "Insider Forces And Wage Determination," Economics Series Working Papers 9972, University of Oxford, Department of Economics.
- Michael P. Keane, 1991.
"Individual heterogeneity and interindustry wage differentials,"
Discussion Paper / Institute for Empirical Macroeconomics
54, Federal Reserve Bank of Minneapolis.
- Michael P. Keane, 1993. "Individual Heterogeneity and Interindustry Wage Differentials," Journal of Human Resources, University of Wisconsin Press, vol. 28(1), pages 134-161.
- Blanchflower, D. & Oswald, A. & Garrett, M., 1988.
"Insider Power In Wage Determination,"
319, London School of Economics - Centre for Labour Economics.
- Papola, T S & Bharadwaj, V P, 1970. "Dynamics of Industrial Wage Structure: An Inter-country Analysis," Economic Journal, Royal Economic Society, vol. 80(317), pages 72-90, March.
- David Blanchflower & L Katz & G Loveman, 1993.
"A Comparison of Changes in the Structure of Wages in Four OECD Countries,"
CEP Discussion Papers
dp0144, Centre for Economic Performance, LSE.
- Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1995. "A Comparison of Changes in the Structure of Wages in Four OECD Countries," NBER Chapters, in: Differences and Changes in Wage Structures, pages 25-66 National Bureau of Economic Research, Inc.
- Gittleman, Maury & Wolff, Edward N, 1993. "International Comparisons of Inter-industry Wage Differentials," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 39(3), pages 295-312, September.
- Joseph E. Stiglitz, 1974.
"Equilibrium Wage Distributions,"
Cowles Foundation Discussion Papers
375, Cowles Foundation for Research in Economics, Yale University.
- Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
- William T. Dickens, 1986. "Wages, Employment and the Threat of Collective Action by Workers," NBER Working Papers 1856, National Bureau of Economic Research, Inc.
- Solow, Robert M, 1985. " Insiders and Outsiders in Wage Determination," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 411-28.
- 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.
- Robert Gibbons & Lawrence F. Katz, 1992.
"Does Unmeasured Ability Explain Inter-Industry Wage Differentials?,"
NBER Working Papers
3182, National Bureau of Economic Research, Inc.
- Gibbons, Robert & Katz, Lawrence F, 1992. "Does Unmeasured Ability Explain Inter-industry Wage Differentials?," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 515-35, July.
- John P. Haisken-DeNew & Christoph M. Schmidt, 2000.
"Interindustry and Interregion Differentials: Mechanics and Interpretation,"
The Review of Economics and Statistics,
MIT Press, vol. 79(3), pages 516-521, August.
- John P. Haisken-DeNew & Christoph M. Schmidt, . "Inter-Industry and Inter-Region Differentials: Mechanics and Interpretation," Working Papers 9504, SELAPO Center for Human Resources.
- Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
- Machin, Stephen, 1996. "Wage Inequality in the UK," Oxford Review of Economic Policy, Oxford University Press, vol. 12(1), pages 47-64, Spring.
- William T. Dickens & Lawrence F. Katz, 1987. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
- 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.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-39, May.
- Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1993. "A Comparison of Changes in the Structure of Wages," NBER Working Papers 4297, National Bureau of Economic Research, Inc.
- Halvorsen, Robert & Palmquist, Raymond, 1980. "The Interpretation of Dummy Variables in Semilogarithmic Equations," American Economic Review, American Economic Association, vol. 70(3), pages 474-75, June.
- Green, Francis & Machin, Stephen & Manning, Alan, 1996. "The Employer Size-Wage Effect: Can Dynamic Monopsony Provide an Explanation?," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 433-55, July.
- Tarling, Roger & Wilkinson, Frank, 1982. "Changes in the Inter-Industry Structure of Earnings in the Post-War Period," Cambridge Journal of Economics, Oxford University Press, vol. 6(3), pages 231-48, September.
- Weiss, Andrew W, 1980. "Job Queues and Layoffs in Labor Markets with Flexible Wages," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 526-38, June.
- Jorge Saba Arbache, 1999. "A comparison of different estimates of interindustry wage differentials: the case of Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 6(2), pages 67-71.
- Kahn, Lawrence M, 1998. "Collective Bargaining and the Interindustry Wage Structure: International Evidence," Economica, London School of Economics and Political Science, vol. 65(260), pages 507-34, November.
- Andy Dickerson & Francis Green & Jorge Saba Arbache, 2001. "Trade Liberalization and the Returns to Education: A Pseudo-panel Approach," Studies in Economics 0114, Department of Economics, University of Kent.
- Gruetter, Max & Lalive, Rafael, 2009.
"The importance of firms in wage determination,"
Elsevier, vol. 16(2), pages 149-160, April.
- Gruetter, Max & Lalive, Rafael, 2004. "The Importance of Firms in Wage Determination," IZA Discussion Papers 1367, Institute for the Study of Labor (IZA).
- Max Gruetter & Rafael Lalive, . "The Importance of Firms in Wage Determination," IEW - Working Papers 207, Institute for Empirical Research in Economics - University of Zurich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Emma Robinson).
If references are entirely missing, you can add them using this form.