Estimating the Wage Costs of Inter- and Intra-Sectoral Adjustment

The proposition that labour market adjustments to intra-industry trade are less costly than adjustments to inter-industry trade is a widely-held belief amongst trade economists. If it is the case that there are significant sector-specific skills, then this ‘smooth adjustment hypothesis’ seems intuitive. However, direct evidence relating to this issue remains largely anecdotal. In this Paper we adopt the methodology of the micro-econometric labour literature to estimate the returns to tenure within firms, industries and occupations in order to predict the costs, in terms of wage losses, of moving jobs between and within sectors. To do this we use a large panel of individual workers for the UK over a long period (1975–1998), which enables us to control for unobserved fixed effects which may jointly determine the propensity to move jobs and the wage level.