Inter - Industry Wage Differentials and Job Flows

The paper explores the relationship between job flows and wages in the U.S. manufacturing sector, where wage differentials for seemingly identical workers and job reallocation rates are shown to be negatively correlated across 3-digit industries. High wage industries have the lowest turnover of jobs, offering more secure employment opportunities. In a regression of wage differentials on industry characteristics, the role of job flows is robust to the inclusion of many variables that typically help explain the wage structure. However, average education in a worker’s industry, firm size, and capital-per-employee jointly render the coefficient on industry job flows low and insignificant. To explain these findings, an inter-sectoral equilibrium model of the labor market with endogenous job destruction is developed. Employer-provided training in firmspecific skills provides the necessary mechanism that increases wages when job flows are low, due to the dependence of training investments on expected job duration and through exogenous differences in skill requirements. The role of average education can then be explained by a complementarity between training and observable ex-ante abilities of workers, so that average education in the regression proxies for the average amount of training that workers receive in an industry.