Inter-industry wage differentials in Pakistan

The essential feature of a perfectly competitive labour market is that workers who accept jobs can expect to receive compensation equal to their opportunity cost. Firms pay a wage which is just sufficient enough, to attract workers of the quality they desire and no higher [Krueger and Summers (1988)]. Overall, the markets do not follow the law of one price, contradicting the competitive framework. This is where the problem of wage differentials across different industries needs to be assessed, and has also been the focus of many studies over the years, mainly in the industrialised countries, e.g. USA, European Countries. However, the issue of wage differentials has been addressed by very few studies in the developing countries [Arbache (2001) and Erdil, et al. (2001)]. Wage differentials analysis in developing countries should also have equal importance as in the industrialised countries, in order to gauge the effect of the corporate culture and centralisation/decentralisation on the different industries and labour market of those developing countries. Numerous wage differential studies have been carried out in the recent years [Krueger and Summers (1988), Lucifora (1993), Rycx (2002)]. Krueger and Summers (1988), who were pioneers in this study area, demonstrated that pay differentials existed in the USA amongst workers with the same working conditions and individual characteristics in different sectors. This study was the start of the growth of literature in this area, around the world. In contrast, obtaining the appropriate data in developing countries is the main challenge, as the data may not be reliable or detailed data in not available. This paper attempts to fill the gap of the inter-industry wage differentials in developing countries. This paper is the first to examine industry wage differentials in Pakistan using the advanced econometric techniques. It estimates: (i) inter-industry wage differentials (ii) dispersion of industry wage differentials (iii) inter-industry wage differentials by different regions and education level (iv) changes in the trend of wage differentials during a fourteen year period.. The wage differential has been calculated using the methodology used by Rycx (2003). The pseudo-panel approach coined by Deaton (1985) has been used, as the data used in the analysis is not normal panel data. In order to find the wage differentials information from the Labour Force Survey (LFS), which is carried out by the Federal Bureau of Statistics (FBS) Government of Pakistan, data is used for eight different surveys during a fourteen year time period, between 1990- 91 and 2003-04. The remainder of this paper is organised as follows. Section 2 reviews some empirical literature in this area, Section 3 describes the data, Section 4 explains the methodology and Section 5 gives an overview of the empirical findings. Section 6 gives the conclusion.