Wage Differentials in the Post Liberalized Labor Market in Pakistan

In this paper, we investigate the wage differentials that exist in the post-liberalized labor market in Pakistan. The increasing wage differential contradicts standard labor theories and models. The literature also confirms the existence of wage differentials across different labor markets both in industrialized and non-industrialized countries. The firms compensate the workers both on their observable and unobservable characteristics. The mincer equation used in its semi-logarithmic decomposed form to derive wage differentials. The weighted adjusted standard deviation technique is used for further decomposition of the level and regional variations in sectoral wage gaps, as suggested by Horrace and Oaxaca. The sectoral heterogeneity, skill characteristics and regional dispersions derived by using the micro labor force data sets spread over thirty years. The results confirm the existence of inter-industry wage differentials. However, the size varies across the regions, levels of education, and types of occupations. A substantial difference in the wage gap observed in firms both in the formal and informal sectors. The financial services firms pay higher than the average national wage followed by firms in utility services, the services sector, and the mining sector. The firms in the agricultural sector pay lower than the average national wage. The dispersion in wages has risen to the magnitude of almost 25 percent over the last three decades. Firms pay higher wages to high-skill workers, while industries requiring jobs with low skills pay lower wages. The wage differentials in various regions are attributable to the persistent and relative backwardness of provinces. The high-skilled occupations in general are likely to have more benefits than those involving low-skilled workers. Individual and household characteristics account for almost 50 percent of variation regardless of the sectoral affiliation. The increase in the minimum wage, with targeted social policies in educational attainment, increased participation of women, and provision of social services in the informal sector may reduce the gap in wage difference.