INTER-INDUSTRY WAGE DIFFERENTIALS: Empirical Evidence 6


The wage-effort offer curves in Figure 3.6 for 1960 and 1965 show the distinct backward bending form of the wage-effort that was evident in the two-digit data in Figure 3.2. The lowest curve in Figure 3.5 is the wage-effort offer curve in 1960. Between 1960 and 1970 two changes appear to be happening. First the backward bending portion of the wage-effort curve has been diminishing, possibly due to the decline in the power that unions had which allowed them to negotiate favorable contracts in the early sixties. In addition, the entire curve has been shifting up and to the right review.

Table 3.3:
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The rightward shift is most evident in the labor-intensive sectors at the lower left portion of the curve. This appears to be due to a relative increase in capital intensity of these sectors. The average increase in capital intensity between 1960 and 1970 was 34% according to the Bartelsman data. Yet the largest increases occurred among the labor-intensive industries, as can be seen in table 3.4 which breaks capital growth down by capital intensity in 1960.
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The most capital-intensive industries increased their capital intensity on average only 20% compared to over 55% in labor-intensive industries. This pattern of change in capital intensities is exclusive to the sixties. Table 3.5 shows the results from three cross-sectional models regressing log capital intensity across industries on their values from the previous decade. The pattern of capital deepening can be seen in the slope coefficient. If the slope is less than one deepening is occurring primarily in the labor-intensive sectors, greater than one implies deepening in the capital-intensive sectors. The slope is significantly below one in the sixties but very nearly one in the following two decades. These changes may be indicative of technological change. They may also be indicative of the movement of the most labor-intensive sub-sectors offshore.
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The 1970s were very different from the 1960s. Figure 3.6 compares the wage-effort offer curves for 1970, 1975 and 1980. The backward bending portion of the wage-effort offer curve completely disappeared in the seventies. In addition, the offer curve twisted with the low-wage low-effort contracts experiencing a 15% reduction in wages and the high-wage high-effort contracts enjoying a 20% increase. The ratio of real hourly wages between the two end points of the curve increased from 2.3 in 1970 to over 3.3 in 1980 and peaked at 3.5 in 1985 before it stabilized at about 3.45. We are inclined to associate this twisting of the curve with the 1970’s decline in the relative price of labor-intensive manufactures that is documented in Leamer( 1997a).