ports the results of research and analysis undertaken by U.S. Census Bureau staff. It has undergone a Census Bureau review more limited in scope than that given to official Census Bureau publications. This document is released to inform interested parties of ongoing research and to encourage discussion of work in progress. The views expressed herein are attributable only to the authors and do not represent the views of the U.S. Census Bureau, its program sponsors, Cornell University, or data providers. Some or all of the data used in this paper are confidential data from the LEHD Program. The U.S. Census Bureau supports external researchers' use of these data through the Research Data Centers (see www.ces.census.gov). For other questions regarding the data, please contact Jeremy S. Wu, Program Manager,

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We consider the problem of estimating and decomposing wage di¤erentials in the presence of unobserved worker, …rm, and match heterogeneity. Controlling for these unobservables corrects omitted variable bias in previous studies. It also allows us to measure the contribution of unmeasured characteristics of workers, …rms, and worker-…rm 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 heterogeneity is ignored.JEL Codes: J31, C23