Inter-industry Wage Differences and Individual Heterogeneity

Two well‐established findings are apparent in the analyses of individual wage determination: cross‐section wage equations can account for less than half of the variance in earnings and there are large and persistent inter‐industry wage differentials. We explore these two empirical regularities using longitudinal data from the British Household Panel Survey (BHPS). We show that around 90% of the variation in earnings can be explained by observed and unobserved individual characteristics. However, small – but statistically significant – industry wage premia do remain, and there is also a role for a rich set of job and workplace controls.