Does Unmeasured Ability Explain Inter-Industry Wage Differentials?

Robert Gibbons and Lawrence Katz

The Review of Economic Studies, 1992, vol. 59, issue 3, 515-535

Abstract: This paper provides empirical assessments of the two leading explanations of measured inter-industry wage differentials: (1) true wage differentials exist across industries, and (2) the measured differentials simply reflect unmeasured differences in workers' productive abilities. First, we summarize the existing evidence on the unmeasured-ability explanation. Second, we construct a simple model which shows that if matching is important then endogenous job-change decisions can create important self-selection biases even in first-differenced estimates of industry wage differentials. Third, we analyze a sample that approximates the experiment of exogenous job loss. We find that (i) the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross-section, and (ii) pre-displacement industry affiliation plays an important role in post-displacement wage determination.

Date: 1992
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Working Paper: Does Unmeasured Ability Explain Inter-Industry Wage Differentials? (1989)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:59:y:1992:i:3:p:515-535.

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