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Worker Heterogeneity, Intra-firm Externalities and Wage Compression

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Author Info
Alison L Booth
Gylfi Zoega (Department of Economics, Mathematics & Statistics, Birkbeck)

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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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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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Find related papers by JEL classification:
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
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