Firm wage differentials in a competitive industry: some matched-panel evidence Pedro S. Martins University of Warwick, Coventry, UK Keywords Pay differentials, Garment industry, Portugal Abstract Studies wage dispersion across ®rms and time in a speci®c industry that exhibits competitive features ± the Portuguese clothing industry in the 1991-1994 period. By drawing on a large matched employer-employee panel, obtains the following results: the workers’ ®rm af®liation plays an important role in wage determination; there is a sizeable and persistent dispersion of ®rm-®xed effects, which is also similar for workers of different tenure levels and occupations; workers in high-turnover ®rms are generally paid less. It is believed that these ®ndings are not consistent with a simple competitive labour market model. 1. Introduction How competitive are labour markets? Economists have examined this question at least since the pioneering analysis of Adam Smith. Understandably, this matter is still of interest now, more than 200 years after his work, as our knowledge of the labour market impacts considerably on both theory and policy, in dimensions both directly and indirectly related to labour issues. With regard to assessing the degree of competitiveness in labour markets, several types of analysis have been attempted. A ®rst type addresses unemployment and, in particular, whether it is best understood as a voluntary or involuntary phenomenon. A second type of analysis concerns the role of pro®t sharing in the wage determination process. The present paper stems from a third type of approach, which considers industry wage differentials. This line of research involves studying the role of industry af®liation on wages. It is argued that, if only the workers’ human capital in¯uences their productivity, as is assumed by the competitive model, then industry membership should be irrelevant in the wage determination process, once the role of such human capital is accounted for. Exceptions to this result will only occur under speci®c circumstances, such as compensating differentials, short-run industry shocks or a lack of proper control for differences of workers’ characteristics. The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/researchregister http://www.emeraldinsight.com/0143-772 0.htm The author thanks Martyn Andrews, Orley Ashenfelter, Paul Bingley, Pierre Cahuc, Joop Hartog, Francis Kramarz, Reamonn Lydon, Andrew Oswald, Pedro Portugal, seminar participants at the Universities of Warwick, Manchester, Helsinki (HKKK), Paris (Sorbonne) and Brussels (ULB), an anonymous referee and, in particular, his supervisors, Ian Walker and Robin Naylor for their comments. He also offers thanks for the ®nancial support from Fundac ¸ a ã o para a Cie Ãncia e a Tecnologia (SFRH/BD/934/2000) and the British Council and for logistical support from Banco de Portugal. All errors are his own responsibility. IJM 24,4 336 InternationalJournal of Manpower Vol. 24 No. 4, 2003 pp. 336-346 q MCB UP Limited 0143-7720 DOI 10.1108/01437720310485889