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Worker Heterogeneity, Intra-firm Externalities and Wage Compression

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  • Alison L Booth
  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We develop a model of monopsonistic wage competition with heterogenous worker ability and intra-firm production complementarities. We use this to illustrate the conditions under which: (i) the divergence between wages and productivity is an equilibrium phenomena; and (ii) this divergence is increasing in worker ability. While the first result is well-known, the second is new. It derives from the intra-firm externalities that, it has sometimes been argued, justify a firm's existence. We show how the model can be used to explain a number of empirical regularities that have hitherto been viewed as puzzles. We then confirm the empirical relevance of our model using new establishment-level data.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF%200515.pdf
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0515.

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Date of creation: Oct 2005
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Handle: RePEc:bbk:bbkefp:0515

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Related research

Keywords: Heterogeneous workers; hierarchical assignment models; monopsonistic competition; wage compression; intra-firm externalities.;

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References

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Citations

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Cited by:
  1. Gylfi Zoega & Thorlakur Karlsson, 2005. "Does Wage Compression Explain Rigid Money Wages?," Birkbeck Working Papers in Economics and Finance 0516, Birkbeck, Department of Economics, Mathematics & Statistics.
  2. Harley Frazis & Mark A Loewenstein, 2006. "Wage Compression and the Division of Returns to Productivity Growth: Evidence from EOPP," Working Papers 398, U.S. Bureau of Labor Statistics.

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