Industry Wage Differentials: A Firm-Based Approach
August 2023
Working Paper Number:
CES-23-40
Abstract
We revisit the estimation of industry wage differentials using linked employer-employee data
from the U.S. LEHD program. Building on recent advances in the measurement of employer wage premiums, we define the industry wage effect as the employment-weighted average workplace premium in that industry. We show that cross-sectional estimates of industry differentials overstate the pay premiums due to unmeasured worker heterogeneity. Conversely, estimates based on industry movers understate the true premiums, due to unmeasured heterogeneity in pay premiums within industries. Industry movers who switch to higher-premium industries tend to leave firms in the origin sector that pay above-average premiums and move to firms in the destination sector with below-average premiums (and vice versa), attenuating the measured industry effects. Our preferred estimates reveal substantial heterogeneity in narrowly-defined industry premiums, with a standard deviation of 12%. On average, workers in higher-paying industries have higher observed and unobserved skills, widening between-industry wage inequality. There are also small but systematic differences in industry premiums across cities, with a wider distribution of pay premiums and more worker sorting in cities with more highpremium firms and high-skilled workers.
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:
economist,
industrial,
earnings,
employee,
employed,
labor,
heterogeneity,
unobserved,
bias,
workplace,
workforce,
worker,
wage effects,
industry wages,
wage differences,
wage industries,
wage data,
premium,
disparity
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Ordinary Least Squares,
National Longitudinal Survey of Youth,
Census Industry Code,
North American Industry Classification System,
American Community Survey,
Longitudinal Employer Household Dynamics,
AKM,
Census Bureau Disclosure Review Board
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