Assessment Task 1: Evaluation of Articles in Behavioural Economics
Interindustry Wage Differentials
by Richard H. Thaler
Under perfectly competitive labour market, the market wage rate is determined by equating the market
demand for labour with the market supply of labour. Inter-industry wage differentials are assumed to raise as
a result of difference in skill requirements and working conditions. Yet, findings demonstrate that wage
differentials also exists among workers with similar acquired skills and within similar working conditions.
This paper reports the studies by Dickens and Katz and by Krueger and Summers, which provide evidence
that industry wage have degree of consistency across countries and occupational groups, and for both the
union and nonunion sectors. To illustrate this, relatively high-wage industries in 1923, such as auto
manufacturing, continued to be high-wage industries in 1984, where as low-wage industries such as boot and
shoe manufacturing continued to be low-wage industries. This paper suggests that individual wages are not
solely determined by personal productive characteristics or task descriptions, and analyses the degree to
which employer features effect wages.
A basic implication of the competitive market is that difference in wages, reflect compensating differences;
unmeasured undesirable aspects of the working conditions. A clear example being the unpleasant and unsafe
working environment in the mine industry. Krueger and Summers investigated the effect of certain working
conditions characteristics on the wage equation. Findings demonstrated that, in fact, variables affecting
working conditions do not substantially alter the measured interindustry wage differentials. Furthermore data
on quit rates implies that, there is no correlation between industry wage rates and quit rates. This means that
workers feel that they are being paid wages in excess of their opportunity costs.
Additionally, Krueger and Summers investigate worker quality by compare the wage regressions with and
without labor quality controls. The results implied that industry wage differentials are positively correlated
with observed ability measures, and most probably, unobserved quality is positively correlated with observed
quality. Supporters of the unobserved ability model, such as Murphy and Topel, argued that the wage
equations explain a very small proportion of the variance, and presumably most of the unexplained variance
is due to unobserved ability. This leads to the rejection of the hypothesis that high-wage industries draw
disproportionately more high-ability workers . Consequently, non-competitive forces play an important in the
wage determination process. This is further highlighted by the studies of Blackburn and Neumark as their
findings demonstrated a negative relationship between an industry's wages and the average IQ score of its
workers.
Industry wage differences appear to be related to a firm’s ‘ability to pay’; measured...
