Industry Wage Differentials: How Many, Big and Significant Are They?

In this paper we examine three implementation and interpretation issues associated with Krueger and Summers’s (1988) method for calculating interindustry wage differentials. The literature tends to report a less than complete set of industry wage differentials; use the wrong standard errors; and misinterpret the meaning of the industry wage differentials. The solution to the first two issues follows from making explicit the restriction that the employment-weighted average of all industry wage effects is zero, the same restriction that Krueger and Summers are implicitly imposing on industry wage effects. All industries have thus a wage effect relative to an average worker net of any industry effect and correct standard errors are available via the Delta Method. Finally, we propose a method for analysing interindustry wage differentials as actual differences between wage levels expressed in percentage points and not as log points, which is the current misleading standard. Our procedure calculates actual average percentage wage differences by industry and avoids the distortion in differences across industries that log point comparisons engender. An application is provided, using the United States Outgoing Rotation Files of the Current Population Survey for 1989 and 1996 and so updates the work by Krueger and Summers (1988). (JEL: C12 and J31)