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Testing for Factor Price Equality with Unobserved Differences in Factor Quality or Productivity

September 2012

Working Paper Number:

CES-12-32

Abstract

We develop a method for identifying departures from relative factor price equality that is robust to unobserved variation in factor productivity. We implement this method using data on the relative wage bills of non-production and production workers across 170 local labor markets comprising the continental United States for 1972, 1992 and 2007. We find evidence of statistically significant differences in relative wages in all three years. These differences increase in magnitude over time and are related to industry structure in a manner that is consistent with neoclassical models of production.

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:
market, production, econometric, industrial, cost, substitute, labor, price, regional, factory, economically, pricing, econometrician, industries estimate, labor markets, disparity

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Standard Industrial Classification, National Science Foundation, Center for Economic Studies, Cobb-Douglas, Bureau of Economic Analysis, Current Population Survey, North American Industry Classification System, North American Industry Classi

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