Most analyses of wage structure in Japan, especially those of inter-firm wage differentials, are not satisfactory because they treat “nenko” wage (or higher wage in the internal labor market) as given in the framework of competitive labor market without any persuasive explanation. Recently, economists have paid much attention to firm specific labor among various perspectives on the “nenko” wage (or internal labor market).
But the existing theory of firm specific labor fails to seize two important characteristics of firm specific labor: 1) The existing theory does not consider the discriminating hiring policy to sort out efficient trainees according to workers' indices and signals. This discrimination implies the segmentation of labor market and the relative scarcity of workers who are to be trained as firm specific labor. 2) The existing theory neglects the fact that a situation of bilateral monopoly between the firm and firm specific labor will emerge in the determination of wage once workers become firm-specific. In this paper, taking account of these characteristics, I reconstruct a model of wage structure in which I integrate three mutually related elements: firm specific labor, dual labor market structure and discrimination against workers by their indices and signals. Using this model, I can show some possible hypotheses concerning inter-firm wage differentials, i.e., so-called “dual structure” of wages and its subsequent changes.