A theory of inter-industry wage differentials

Abstract

The purpose of this paper is to present a modeJ which broadly fits some of the salient features of Inter-industry wage differentials. Several recent empirical papers have found wage differences accross industries to be large and persistent. They also show high concordance accross occupations and countries. High wages appear to be paid in industries that have high capital/labor ratios and are highly profitable. Our model explains these facts on the basis of firm-specific human capital accumulation by individual workers. We focus on the bargaining between experienced workers and the firm over the division of the surplus output an experienced worker produces over that produced by inexperienced workers . We show that this surplus, and therefore equilibrium wages of trained workers, depends on the the capital/labor ratio when the technology has putty-clay features. We also show that when there is multilateral bargaining between all firms and experienced workers, wages also depend on the profitability of the firm.