http://www.iser.essex.ac.uk/publications/working-papers/iser/2009-13

Empirical analysis using cross-sectional data commonly find significant wage differences across industries. That is, some industries appear to pay higher wages than others to what appear to be equal workers employed in what appear to be equal firms. However, in a perfectly competitive labour market with similar workers and firms, these differences should not exist as wage differences across industries will encourage workers to move between firms, which would equalises wages. To the extent that inter-industry wage differences may refl‡ect the existence of non-competitive mechanisms, they are an empirical finding difficult to explain in labour economics. In this paper we investigate the existence and sources of inter-industry wage differences. First, we analyse the size and persistence of wage differences between industries. Second, we look at the effect of the characteristics of the worker, the firm and the match between the two. This allows us to answer questions related to (i) the nature of wage differences: is it because wages are truly different, or are they due to different types of workers employed by the industries, and (ii) which of these effects are the most important in explaining differences in wages across industries? Analysis of the period 1986-2000 suggest the existence of important inter-industry wage differentials. Workers with the same characteristics working in firms with observably equal characteristics have different wages depending on the industry in which they are employed. The wage differences identified are considerable, with some industries paying wages that are more than 41% above the economy average while others pay wages that are more than 26% below the average. Amongst the industries paying the lowest wages, we find the Manufacture of furniture, Textiles, Clothing and Restaurants and cafés. The industries paying the highest wages tend to be related to financial intermediation like Banking or Insurance, the Electricity, gas and water supply services. However, the estimated inter-industry wage structure is greatly weakened when controlling for unobserved characteristics of workers (e.g., unobserved ability), suggesting that the raw differences are due to the concentration of high wage workers in certain industries and not to genuine differences in wages paid by firms across industries. Further analysis, controlling for unobserved characteristics of firms, shows that compensation policies of firms vary across industries and that by changing industries workers may enjoy substantial wage growth. We thus conclude that inter-industry wage differences re‡flect different treats given by firms across industries. Why might firms treat their workers by paying them wages above the economy average? Our results indicate that workers who are paid more than the economy average are less likely to quit. Therefore, we conclude that there is a possibility that firms gain from long term employment relationships. In these circumstances above-average wages are a profit maximising strategy because the costs of higher wages may be offset by the benefits of reduced turnover. This is consistent with a labour market in which industry specific skills are important and where efficiencies are gained from creating incentives to worker-firm attachments.

We analyse the nature of interindustry wage differentials using Portuguese data. Estimates from models controlling for observed worker and firm characteristics reveal significant and persistent raw interindustry differentials, which questions the competitive model of the labour market. However, estimates controlling for unobserved worker heterogeneity suggest that the raw differentials are due to the concentration of high wage workers in certain industries and not to genuine differences 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 differentials are shown to increase the time to separation from firms, and are therefore compatible with the competitive model. Working Paper 2009-13 2009-03-31 Priscila Ferreira Institute for Social and Economic Research paferr@essex.ac.uk http://prisferr.googlepages.com