Unobserved Worker Quality Explains Inter-Industry Wage Differentials

A new GLO Discussion Paper finds that unobserved worker quality accounts for approximately two thirds of the inter-industry wage differentials.

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GLO Discussion Paper No. 491, 2020

Unobserved Worker Quality and Inter-Industry Wage DifferentialsDownload PDF
Ge, Suqin & Macieira, João

GLO Fellow Suqin Ge

Abstract: This study quantitatively assesses two alternative explanations for inter-industry wage differentials: worker heterogeneity in the form of unobserved quality and firm heterogeneity 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.

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GLO Discussion Papers are research and policy papers of the GLO Network which are widely circulated to encourage discussion. Provided in cooperation with EconStor, a service of the ZBW – Leibniz Information Centre for Economics, GLO Discussion Papers are among others listed in RePEc (see IDEAS,  EconPapers)Complete list of all GLO DPs – downloadable for free.


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