Who Earns Their Keep? An Estimation of the Productivity-Wage Gap in Hungary 1986-2005

In this paper we seek to provide new empirical evidence on the relative productivities and wages of various worker groups (by gender, age, and education), based on longitudinal matched employer-employee data from Hungary covering 1986-2005. We estimate the productivity and wage gaps from firm-level production functions and wage equations, using firm-level data on productive inputs and output, wage costs, and the demographic composition of the work force obtained from the linked worker data. This methodology allows us to assess whether productive differences can account for the wage gaps between worker groups, as well as the evolution of these gaps following the transition to a free market. We take firm fixed effects into account to assess the role of selection at the firm level, and estimate the production function via the method of Levinson and Petrin to account for endogeneity of input choice. The results show that while there may be significant differences in productivities and wages between groups in the OLS specification, these mostly become insignificant within firms. We find that much of the fall in the value of skills obtained prior to the transition is due to selection of workers at the firm level.