April 1995 A model of endogenous growth is used to test the effect of education on wage differentials. The presence and persistence of substantial wage differentials between industries has been documented. Differences between wages in different industries could result from (1) the normal functioning of competitive labor markets (compensating differential levels of human capital), (2) institutional factors, such as the presence of a union, and (3) efficiency wages paid in some industries (employers finding they can increase profits by paying workers above-market wages). Using a testable model of endogenous growth, Sakellariou analyzes microdata from the Guatemala Household Survey to estimate the external effects of education. First, he estimates a wage equation and filters out the internal effects of education. Then, to isolate external effects, he regresses the resulting wage premiums in industry on average human capital as well as on industry-specific characteristics. Stronger conclusions cannot be drawn, but the analysis does not reject the hypothesis that external effects are present. This paper--a product of the Education and Social Policy Department--is part of a larger effort in the department to apply economic analysis in the education sector.