Inter-Industry Wage Inequality: Persistent differences and turbulent equalization

Persistent inter-industry wage differentials are an enduring puzzle for neoclassical economics. This paper applies the classical theory of ‘real competition’ to inter-industry wage differentials. Theoretically, we argue that competitive wage determination can be decomposed into equalizing, dispersing and turbulently equalizing factors. Empirically, we show graphically and econometrically for 31 U.S. industries in 1987-2016 that wage differentials, like regulating profit rates, are governed by turbulent equalization. Furthermore, we apply a fixed effects OLS as well as a hierarchical Bayesian inference model and find that the link between regulating profit rates and wage differentials is positive, significant and robust.