Does Unmeasured Ability Explain Inter-Industry Wage Differentials?
Lawrence F. Katz
This paper provides empirical assessments of the two leading
explanations of measured inter-industry wage differentials: (1) true wage
differentials exist across industries, and (2) the measured differentials
simply reflect unmeasured differences in workers' productive abilities.
First, we summarize the existing evidence on the unmeasured-ability
explanation, which is based on first-differenced regressions using matched
Current Population Survey (CPS) data. We argue that these existing
approaches implicitly hypothesize that unmeasured productive ability is
equally rewarded in all industries. Second, we construct a simple model in
which unmeasured ability in not equally valued in all industries; instead,
there is matching. This model illustrates two endogeneity problems inherent
in the first-differenced regressions using CPS data: whether a worker
changes jobs in endogenous, as is the industry of the new job the worker
finds. Third, we propose two new empirical approaches designed to minimize
these endogeneity problems. We implement these procedures on a sample that
allows us to approximate the experiment of exogenous job loss: a sample of
workers displaced by plant closings. We conclude from our findings using
this sample that neither of the contending explanations fits the evidence
without recourse to awkward modifications, but that a modified version of the
true-industry-effects explanation fits more easily than does any existing
version of the unmeasured-ability explanation.
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