Inter-industry Wage Differences and Individual Heterogeneity: How Competitive is Wage Setting in the UK?
There 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.
|Date of creation:||Dec 1999|
|Contact details of provider:|| Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP|
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/
|Order Information:|| Email: |
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.:
- Stiglitz, Joseph E, 1985.
"Equilibrium Wage Distribution,"
Royal Economic Society, vol. 95(379), pages 595-618, September.
- Robert Gibbons & Lawrence F. Katz, 1989.
"Does Unmeasured Ability Explain Inter-Industry Wage Differentials?,"
NBER Working Papers
3182, National Bureau of Economic Research, Inc.
- Robert Gibbons & Lawrence Katz, 1992. "Does Unmeasured Ability Explain Inter-Industry Wage Differentials?," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 515-535.
- Nickell, S. & Wadhwani, S., 1989.
"Insider Forces And Wage Determination,"
Economics Series Working Papers
9972, University of Oxford, Department of Economics.
- 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.
- Halvorsen, Robert & Palmquist, Raymond, 1980. "The Interpretation of Dummy Variables in Semilogarithmic Equations," American Economic Review, American Economic Association, vol. 70(3), pages 474-475, June.
- Michael P. Keane, 1993.
"Individual Heterogeneity and Interindustry Wage Differentials,"
Journal of Human Resources,
University of Wisconsin Press, vol. 28(1), pages 134-161.
- Michael P. Keane, 1991. "Individual heterogeneity and interindustry wage differentials," Discussion Paper / Institute for Empirical Macroeconomics 54, Federal Reserve Bank of Minneapolis.
- 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.
- Machin, Stephen, 1996. "Wage Inequality in the UK," Oxford Review of Economic Policy, Oxford University Press, vol. 12(1), pages 47-64, Spring.
- 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 231-248, September.
- 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, "undated". "Inter-Industry and Inter-Region Differentials: Mechanics and Interpretation," Working Papers 9504, SELAPO Center for Human Resources.
- William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
- Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-239, May.
- 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 507-534, November.
- Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
- Solow, Robert M, 1985. " Insiders and Outsiders in Wage Determination," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 411-428.
- 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 526-538, June.
- Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1, September.
- 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 433-455, July.
- 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.
- 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.
- William T. Dickens, 1986. "Wages, Employment and the Threat of Collective Action by Workers," NBER Working Papers 1856, National Bureau of Economic Research, Inc.
- David G. Blanchflower & Andrew J. Oswald & Mario D. Garrett, 1989.
"Insider Power in Wage Determination,"
NBER Working Papers
3179, National Bureau of Economic Research, Inc.
- Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
- 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.
- 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.
- Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:9914. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tracey Girling)
If references are entirely missing, you can add them using this form.