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

  • Kevin Reilly

    (Leeds University Business School)

  • Luisa Zanchi

    (Leeds University Business School)

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)

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Paper provided by EconWPA in its series Labor and Demography with number 0209001.

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Date of creation: 16 Sep 2002
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Handle: RePEc:wpa:wuwpla:0209001
Note: Type of Document - pdf; prepared on IBM PC; to print on HP A4;
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  1. Zanchi, Luisa, 1998. "Interindustry wage differentials in dummy variable models," Economics Letters, Elsevier, vol. 60(3), pages 297-301, September.
  2. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February.
  3. John P. Haisken-DeNew & Christoph M. Schmidt, . "Inter-Industry and Inter-Region Differentials: Mechanics and Interpretation," Working Papers 9504, SELAPO Center for Human Resources.
  4. Kennedy, Peter E, 1981. "Estimation with Correctly Interpreted Dummy Variables in Semilogarithmic Equations [The Interpretation of Dummy Variables in Semilogarithmic Equations]," American Economic Review, American Economic Association, vol. 71(4), pages 801, September.
  5. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February.
  6. Jeff Borland & Anthony Suen, 1990. "The Ddeterminants of Individual Wages in Australia: Competitive and Non-Competitive Influences," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 23(4), pages 33-44.
  7. Edin, Per-Anders & Zetterberg, Johnny, 1992. "Interindustry Wage Differentials: Evidence from Sweden and a Comparison with the United States," American Economic Review, American Economic Association, vol. 82(5), pages 1341-49, December.
  8. Winter-Ebmer, Rudolf, 1992. "Endogenous Growth, Human Capital, and Industry Wages," CEPR Discussion Papers 714, C.E.P.R. Discussion Papers.
  9. 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.
  10. Goux, Dominique & Maurin, Eric, 1999. "Persistence of Interindustry Wage Differentials: A Reexamination Using Matched Worker-Firm Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 492-533, July.
  11. 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.
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