Inter-industry Wage Differentials and Allocative Inefficiency.

Do inter-industry wage differentials reveal information on allocative inefficiency, implying that reallocation of labor input from low- to high-wage sectors improves aggregate productivity? This question is addressed by introducing wage-weighted averages of sector employment growth in growth regressions using panel data for selected OECD countries over the period 1971-93. For the 1970s, it is found that reallocation of labor between sectors with different wages did not contribute to explaining economic growth, whereas it did for the 1980s. Hence, observable wage differentials only reflect allocative inefficiency after 1980. [ABSTRACT FROM AUTHOR]