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Industry Wage Differentials: How Many, Big and Significant Are They?

Author

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  • Kevin Reilly

    (Leeds University Business School)

  • Luisa Zanchi

    (Leeds University Business School)

Abstract

In this paper we examine three implementation and interpretation issues associated with Krueger and Summers’s (1988) method for calculating interindustry wage differentials. The literature tends to report a less than complete set of industry wage differentials; use the wrong standard errors; and misinterpret the meaning of the industry wage differentials. The solution to the first two issues follows from making explicit the restriction that the employment-weighted average of all industry wage effects is zero, the same restriction that Krueger and Summers are implicitly imposing on industry wage effects. All industries have thus a wage effect relative to an average worker net of any industry effect and correct standard errors are available via the Delta Method. Finally, we propose a method for analysing interindustry wage differentials as actual differences between wage levels expressed in percentage points and not as log points, which is the current misleading standard. Our procedure calculates actual average percentage wage differences by industry and avoids the distortion in differences across industries that log point comparisons engender. An application is provided, using the United States Outgoing Rotation Files of the Current Population Survey for 1989 and 1996 and so updates the work by Krueger and Summers (1988). (JEL: C12 and J31)

Suggested Citation

  • Kevin Reilly & Luisa Zanchi, 2002. "Industry Wage Differentials: How Many, Big and Significant Are They?," Labor and Demography 0209001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpla:0209001
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Philip Du Caju & François Rycx & Ilan Tojerow, 2012. "Wage structure effects of international trade in a small open economy: the case of Belgium," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 297-331, June.
    2. Philip Du Caju & Gábor Kátay & Ana Lamo & Daphne Nicolitsas & Steven Poelhekke, 2010. "Inter-Industry Wage Differentials In EU Countries: What Do Cross-Country Time Varying Data Add to the Picture?," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 478-486, 04-05.
    3. Robert Plasman & François Rycx & Ilan Tojerow, 2007. "Wage differentials in Belgium: the role of worker and employer characteristics," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 11-40.
    4. Du Caju, Philip & Rycx, François & Tojerow, Ilan, 2008. "Rent-Sharing and the Cyclicality of Wage Differentials," IZA Discussion Papers 3844, IZA Network @ LISER.
    5. François Rycx & Ilan Tojerow & Daphné Valsamis, 2008. "Wage differentials across sectors in Europe: an east-west comparison," DULBEA Working Papers 08-17.RS, ULB -- Universite Libre de Bruxelles.
    6. Brenda Gannon & Robert Plasman & Francois Rycx & Ilan Tojerow, 2007. "Inter-Industry Wage Differentials and the Gender Wage Gap: Evidence from European Countries," The Economic and Social Review, Economic and Social Studies, vol. 38(1), pages 135-155.
    7. Philip Du Caju & François Rycx & Ilan Tojerow, 2011. "Inter‐Industry Wage Differentials: How Much Does Rent Sharing Matter?," Manchester School, University of Manchester, vol. 79(4), pages 691-717, July.
    8. Camilo Morales-Jimenez, 2017. "The Cyclical Behavior of Unemployment and Wages under Information Frictions," 2017 Meeting Papers 366, Society for Economic Dynamics.
    9. Robert Plasman & François Rycx & Ilan Tojerow, 2006. "Industry wage differentials, unobserved ability, and rent-sharing: evidence from matched employer-employee, 1992-2005," DULBEA Working Papers 06-14.RS, ULB -- Universite Libre de Bruxelles.
    10. Robert Plasman & François Rycx & Ilan Tojerow, 2006. "Industry wage differentials, unobserved ability, and rent-sharing : Evidence from matched worker-firm data, 1995-2002," Working Paper Research 90, National Bank of Belgium.
    11. Brenda Gannon & Brian Nolan, 2004. "Inter-Industry Wage Differentials in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 35(2), pages 157-182.
    12. Guerrazzi, Marco, 2025. "A two-sector model of optimal growth in which labour is employed only in the industry of consumption goods: A complete characterization of equilibrium paths," MPRA Paper 126101, University Library of Munich, Germany.
    13. Guerrazzi, Marco, 2025. "A two-sector model of optimal growth in which labour is employed only in the industry of investment goods: A complete characterization of equilibrium paths," MPRA Paper 126299, University Library of Munich, Germany.
    14. Koirala, Govinda, 2007. "An analysis of labor wage differentials in Nepal," Journal of Asian Economics, Elsevier, vol. 18(4), pages 636-648, August.
    15. Du Caju, Philip & Rycx, François & Tojerow, Ilan, 2011. "Wage structure effects of international trade: evidence from a small open economy," Working Paper Series 1325, European Central Bank.

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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