Wage Di¤erentials in the Presence of Unobserved Worker, Firm, and Match Heterogeneity," manuscript

We consider the problem of estimating and decomposing wage di¤erentials in the presence of unobserved worker, \u85 rm, and match heterogeneity. Controlling for these unobservables corrects omitted variable bias in previous studies. It also allows us to measure the contribution of unmea-sured characteristics of workers, \u85 rms, and worker-\u85rm matches to observed wage di¤erentials. An application to linked employer-employee data shows that decompositions of inter-industry earnings di¤erentials and the male-female di¤erential are misleading when unobserved hetero-geneity is ignored. JEL Codes: J31, C2