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Unobserved Worker Quality and Inter-Industry Wage Differentials


  • Ge, Suqin
  • Macieira, João


This study quantitatively assesses two alternative explanations for inter-industry wage differentials: worker heterogeneity in the formof unobserved quality and firmheterogeneity in the form of a firm's willingness to pay (WTP) for workers' productive attributes. We develop an empirical hedonic model of labor demand and apply a two-stage nonparametric procedure to recover worker and firm heterogeneities. In the first stage we recover unmeasured worker quality by estimating market-specific hedonic wage functions nonparametrically. In the second stage we infer each firm's WTP parameters for worker attributes by using first-order conditions from the demand model. We apply our approach to quantify inter-industry wage differentials on the basis of individual data from the NLSY79 and find that worker quality accounts for approximately two thirds of the inter-industry wage differentials.

Suggested Citation

  • Ge, Suqin & Macieira, João, 2020. "Unobserved Worker Quality and Inter-Industry Wage Differentials," GLO Discussion Paper Series 491, Global Labor Organization (GLO).
  • Handle: RePEc:zbw:glodps:491

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    hedonic models; inter-industry wage di§erentials; labor quality; wage determination;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions


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