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Unobserved Worker Quality and Inter‐Industry Wage Differentials

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  • Suqin Ge
  • João Macieira

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. Building on hedonic models of differentiated product demand, 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

  • Suqin Ge & João Macieira, 2024. "Unobserved Worker Quality and Inter‐Industry Wage Differentials," Journal of Industrial Economics, Wiley Blackwell, vol. 72(1), pages 459-515, March.
    • Handle: RePEc:bla:jindec:v:72:y:2024:i:1:p:459-515
    DOI: 10.1111/joie.12361
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    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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