Inter-industry wage inequality: persistent differences and turbulent equalisation

Abstract

Abstract The empirical stylised fact of persistent inter-industry wage differentials is an enduring challenge to economic theory. This paper applies the classical theory of ‘real competition’ to the turbulent dynamics of these inter-industrial wage differentials. Theoretically, we argue that competitive wage determination can be decomposed into equalising, dispersing and turbulently equalising factors. Empirically, we show graphically and econometrically for 31 US industries in 1987–2016 that wage differentials, like regulating profit rates, are governed by turbulent equalisation. Furthermore, we apply a fixed-effects OLS as well as a hierarchical Bayesian inference model and find that the link between regulating profit rates and wage differentials is positive, significant and robust.