The industry premium: What we know and what the New Zealand data say

Abstract

Earning regressions often reveal time‐invariant industry premiums. Competitive theories explain them by referring to unobservable characteristics or compensating differentials. Non‐competitive theories do the same by using efficiency wage, insider‐outsider and rent sharing hypotheses. Those theories appear inadequate for explaining what one observes from the New Zealand data: employees receive industry premiums; but so do their self‐employed counterparts; among those with no formal education industry premiums from employment are smaller than those from self‐employment; but as the cohort's education level increases the premium differential increases and becomes positive. To explain those observations I propose a new hypothesis that measures an industry's total factor productivity and the corresponding industry premium.

Notes

I thank Alan Rogers, Tim Maloney, Sholeh Maani and Ian King of the University of Auckland, John Gibson, Les Oxley and other May 2000 seminar participants of the Economics Department of the University of Waikato, Adrian Pagan of the Australian National University and the participants of the 1999 Summer Meeting of the New Zealand Econometric Society Group (NZESG) and two anonymous referees for offering valuable comments on an earlier draft of this paper. I received research assistance from Richard Downing and Karim Emami Ijzeh, amicable assistance from Pat Coope of the Statistics New Zealand. Many thanks also to Leine Hunter of the Reserve Bank of New Zealand for painstaking review of this paper. I acknowledge the Marsden Grant #UOA618 for partially funding this research. The usual disclaimer applies.

Department of Economics, The University of Auckland, Private Bag 92019, Auckland, New Zealand. e‐mail: [email protected]