DOES UNMEASURED ABILITY EXPLAIN INTERINDUSTRY WAGE DIFFERENTIALS

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. Second, we construct a simple model which shows that if matching is important then endogenous job-change decisions can create important self-selection biases even in first-differenced estimates of industry wage differentials. Third, we analyze a sample that approximates the experiment of exogenous job loss. We find that (i) the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross-section, and (ii) pre-displacement industry affiliation plays an important role in post-displacement wage determination.