Are wages equal across sectors of production?

Abstract

Abstract The assumption that national labour markets are homogeneous across tradable and non‐tradable goods is common in multisector (open‐economy) macro models and crucial for the prominent Balassa–Samuelson hypothesis. To test it, this study introduces a novel, theory‐based method of distinguishing the tradable and non‐tradable sectors to the Balassa–Samuelson literature and employs modern empirical methods and a large and detailed macro dataset. It finds that both the internal relationship between productivity and wages in the tradable and non‐tradable sectors postulated by the Balassa–Samuelson hypothesis and its external transmission mechanism are rejected.

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