Segmented labour markets and the estimation of wage functions

This paper uses a stratified random sample of private sector employees to estimate wage equations for both the male labour market as a whole and six ‘segments’ of the labour market, segement which are defined with respect to the industry and size characteristics of the employing establishmen. Highly conventional results are obtained when wage equations are estimated for the male labour market as a whole, or within two segements, comprising almost half the survey population. However, one can reject conclusively the hypothesis that the same estimating equation is appropriate for modelling wage determination in all segments and if a ‘human capital’ (HK) model is, within segements, tested against more appropriate alternative hypotheses for wage determination using the Davidson and Mackinnon (1981) methodology for the testing of non-nested hypotheses, the conclusion is that one should reject the HK specification and not reject the alternative.

It is therefore argued that the disaggregation of labour market data reveals differences in the wage determination process that are not consistent with the view that labour markets are ‘dualistic’ but are consistent with the view that are segmented.