published in: Industrial Relations, 2007, 46 (1), 171-202
This paper examines the role of unobserved ability in explaining inter-industry wage
differentials, drawing on data on brothers. Such data allow us to account for unmeasured
abilities due to common family and community factors shared by siblings. Important
advantages of this approach are that we do not rely on assumptions of exogenous job
mobility and that estimates reflect long-run wage differentials rather than short-run
differences following switch of industry. The data sets come from four of the Nordic countries
and the United States. We find that, in the Nordic countries, only a moderate proportion of the
variability in industry wages is due to unobserved ability, while unmeasured factors explain as
much as half of the industry wage variation observed in the United States. Accounting for
such differences, we show that the U.S. inter-industry wage dispersion is similar to those of
the Nordic countries.
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