A pervasive feature of modern industrial economies is the existence of large and persistent wage differentials among seemingly similar workers. Industries such as durable-goods manufacturing, mining, transportation, and utilities appear to pay wages on the order of 15 to 30 percent higher than those paid by the retail trade and many service industries to observationally equivalent workers. The pattern of industry wage differentials is remarkably stable over time and similar across countries with distinct labor-market institutions. These facts suggest that the differentials are neither largely transitory disequilibrium phenomena nor the artifacts of particular collective bargaining institutions or government interventions in the labor market. This project develops theoretical models that can account for the stylized facts concerning the observed pattern of these differentials across industries and establishments and implements empirical tests of the new predictions of the models. This is important because the competing explanations of industry wage differences produce very different positive and normative implications in analyses of several much-debated policy issues. For example, one set of theories is consistent with involuntary unemployment and labor-market segmentation. The others are not. In addition to seeking to explain certain kinds of wage differentials, the project theoretically and empirically examines the effects their existence has on labor-market decisions such as the mobility decisions of employed workers, the recruiting and retention policies of employers, and the job-search behavior of unemployed workers. The research emphasizes the roles of matching, learning, and asymmetric information in the labor market.
