INTER-INDUSTRY WAGE DIFFERENTIALS: Conclusion


Although the shape of the wage-effort offer curves is altered slightly, the same basic patterns of change can be seen in the three periods this.

Conclusions

We have provided in this paper substantial evidence that the US labor market offers a set of wage-effort contracts, with effort measured by annual hours.

This curve is uncovered by estimating two equations using industry level data. One equation explains wages as a function of capital intensity and the other equation explains hours also as a function of capital intensity. By solving out the capital intensity from these two equations we form a wage-hour offer curve.

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We have found that this offer curve shifts in three distinctly different ways. Between 1960 and 1970 the wage-effort offer curve shifted “up” with higher wages offered at every level of effort. Between 1970 and 1980. the wage-effort offer curve “twisted”; with the best contracts getting better and the worst contracts getting worse. Since the 1980s the wage-effort offer curve has shifted to the right, requiring more effort for the same wage level. The upward shift in the 1960s is consistent with capital deepening, the twisting in the 1970s with price declines of labor-intensive tradables, and the rightward shift after 1980 either with the introduction of new equipment or with increases in government mandated benefits.

The weakest link in our empirical analysis is probably the use of hours as a measure of effort. Despite problems with hours as a measure of effort, we find a consistent and significant relationship between wages, effort as measured by hours and capital intensity. This relationship stands up even when we control for the business cycle, education, unionization and estimated industry rents.

This is, of course, not the end of the story by any means. We should be studying tasks, not industries. We should be looking at individual data and data outside of manufacturing. We should be allowing more completely for heterogeneity in ability and tastes. We should have a better measure of unionization. We should explicitly link changes in the wage-effort offer curve to the fundamental drivers such as globalization, technical change and worker benefits. Most of all, we need a better measure of effort.

Though this is not the end of the story, it is a very good beginning.