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Conference Paper Globalisation and Economic Policy Postgraduate Conference

The sources of interindustry wage differentials

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Publication date

26 Mar 2009

Abstract

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.


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