Job Prospects and Pay Gaps: Theory and Evidence on the Gender Gap from U.S. Cities

Are differences in the quality of workers' prospects outside of their current employment relationship influential in generating pay differentials? We consider the role of an economy's industrial structure in generating differences in outside prospects, and apply our analysis to the gender pay gap in the U.S. during the 1980-2010 period. We develop a formal search and matching model that connects outside prospects, industrial structure and wage gaps and use it to guide our subsequent empirical analysis of local labor markets. Our results suggest that an economy's within-industry gender pay gap-which also controls for human capital characteristics-is substantially influenced by gender differences in the quality of outside prospects generated by the economy's industrial structure. Our analysis reveals that the relatively sharp narrowing of the gender pay gap during the 1980s is accounted for by the relatively sharp decline in the outside prospects of men during this period.