In this study, we discuss the wa differences between two areas of the Central Region of Portugal. In particular, we examine whether the observed interregional wage differentials are due to differences in the characteristics of individuals, firms, and occupations or to differences in the rates of return of these characteristics. We found that firm and industry effects are the key explanatory variables. The analysis of wage differentials over time shows that individuals’ and firms’ characteristics have been relatively stable and that the modest increase in inequality, observed in a period of almost a decade, is mostly due to changes in the rates of return.

keywords: earnings functions; inter-industry wage differences; regional wage differentials.