Market Responses to Interindustry Wage Differentials

Abstract

This paper examines the link between interindustry wage differentials and subsequent growth of industry variables such as employment, GDP and labor productivity. We find that industries that paid higher than average wages in 1959 experienced significantly lower employment growth and GDP growth in the subsequent 30 to 40 years, while at the same time experiencing higher-than-average growth in the capital-labor ratio and in labor productivity. We argue that the evidence is best explained by a non-competitive model of the interindustry wage structure, as both firms and the market respond to the wage rigidity implied by the long-run persistence of the interindustry wage structure.