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Firm-level determinants of wages and productivity : Rent-sharing

A long literature in economics has documented evidence of what are called interindustry wage differentials. For example, a well-known JEP article by Richard Thaler opens with an anecdote about a secretary who was hired in his department and a few months later left to accept a job as a secretary at IBM, which at least at the time paid its secretaries much more than other local employers. This example captures the idea that some industries appear to pay higher wages than others, even when (measured) labor quality and occupation are held constant. Slichter (1950) was the first analysis I am aware of which documented evidence of such interindustry wage differentials. Dickens and Katz (1987) and Katz and Summers (1989) both document evidence of such interindustry wage differentials using the Current Population Survey (CPS) by estimating the relationship between the log wage rate and individual characteristics (including occupation) together with industry indicator variables. Such regressions document large, statistically significant “industry effects,” in samples of both union workers and non-union workers. Subsequent work argued that these interindustry wage differentials were unlikely to be easily explained by compensating differentials; as documented by Katz and Summers (1989), for example, high wage industries tend to have low quit rates, which is consistent with workers in such industries begin paid wages in excess of their opportunity costs. Whether unobserved quality is a sufficient explanation is more controversial, but I would say that in general the literature has argued that unobserved quality is not sufficient to explain interindustry wage differentials. Four industry characteristics appear strongly associated with high levels of compensation: firm size, profits, capital intensity, and union density. From a theoretical perspective, these patterns suggest that either some firms are choosing not to maximize profits, or that for