Are there Pecuniary Compensations for Working Conditions in the UK?

This paper explores the nature of inter-industry wage differentials that are not explained by personal characteristics. We document the presence and persistence of a significant contribution of industry affiliation to wage dispersion in the UK. Competing theoretical explanations for this finding call for an empirical investigation to ascertain whether or not competitive forces are at work. We find significant differences across industries in the wages earned by otherwise identical workers. Our study complements findings obtained using panel data techniques where the impact of working conditions and job attributes is removed along with the individual effects. We instead control for a much wider array of firm characteristics, working conditions, job attributes and sources of individual heterogeneity, accounting separately for the contribution of each in explaining wage dispersion across industries. We find that these firm, job and individual characteristics explain part of the inter-industry wage differentials, as much as 35% in 1997 and 26% in 2001. However the unexplained wage dispersion remains substantial and it is larger and less well explained by our variables in 2001 than 1997. A possible explanation is that wage setting reflects non-competitive behaviour but it is also possible that changing working conditions not accounted for contribute to the unexplained remaining dispersion, casting doubt on human capital theories of wage determination.