Decomposing inter-industry wage inequality: The effect of market structure

Many researches looked at wage inequality in the U.S. and relate it to different factors such as gender, race, education, training and skills, skill-biases technological change (SBTC) hypothesis, demand and supply of skilled/unskilled workers, organizational and institutional changes, and others. Yet, no research, to our knowledge, has linked wage inequality to the market structure. This is the focus of this paper. In this paper, we look at the inter-industry wage inequality in the manufacturing sector and relate it to the market structure of the manufacturing sector in two countries: The United States and Turkey.

Using data from the National Bureau of Economic Research (NBER) and TurkStat, we calculate the inter-industry wage inequality for the U.S. and Turkish manufacturing sectors using Theil inequality index. Then, using entropy decomposition analysis, we decompose the wage inequality using workers’ skills and market structure as sub-groups in order to determine the contribution of the sub-groups to the overall wage inequality in the U.S. and Turkish manufacturing sectors. The analysis is done using data form 1981 to 2005.

The results show that in terms of workers’ skills, wages of production workers contributed more to the total wage inequality than did the wages of non-production workers (except for 1992 for Turkey) for both the U.S. and Turkey but the magnitude of the difference is much larger for the U.S. than for Turkey.

Moreover, for Turkey, within-group inequality is more important in explaining the overall wage inequality than the between-group inequality. This is true considering the market structure of the Turkish manufacturing sector and without it, whereas for the U.S. it is different. For the U.S., when we consider the market structure of the manufacturing sector, within-group inequality explains almost all the wage-inequality and the between-group wage inequality contributes very little to the overall wage inequality. On the other side, without considering the market structure of the U.S. manufacturing sector, both within-group and between-group inequalities have almost equal importance in explaining the overall wage inequality.

In terms of market structure, the within-group inequality explains the majority of the overall wage inequality for both the U.S. and Turkish manufacturing sectors. In addition, in the U.S., the competitive industries contribute more to the overall wage inequality than do the tight oligopoly industries, whereas in Turkey it is the opposite: Tight oligopoly industries contribute more to the overall wage inequality than do the competitive industries.