The sources of interindustry wage differentials
We analyse the nature of interindustry wage differentials using Portuguese data. Es- timates from models controlling for observed worker and firm characteristics reveal sig- nificant and persistent raw interindustry diÂ¤erentials, which questions the competitive model of the labour market. However, estimates controlling for unobserved worker het- erogeneity suggest that the raw diÂ¤erentials are due to the concentration of high wage workers in certain industries and not to genuine diÂ¤erences in compensation across industries. However, a complete decomposition shows that (i) firm effects on average explain 70% of the industry wage premia, and (ii) genuine and sizeable interindustry wage differentials exist. These diÂ¤erentials are shown to increase the time to separation from firms, and are therefore compatible with the competitive model.
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