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Worker Heterogeneity, Intra-firm Externalities and Wage Compression

Author

Listed:
  • 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.

Suggested Citation

  • Alison L Booth & Gylfi Zoega, 2005. "Worker Heterogeneity, Intra-firm Externalities and Wage Compression," Birkbeck Working Papers in Economics and Finance 0515, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:0515
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    File URL: https://eprints.bbk.ac.uk/id/eprint/27042
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    References listed on IDEAS

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    Cited by:

    1. Zoega, Gylfi & Karlsson, Thorlakur, 2006. "Does wage compression explain rigid money wages?," Economics Letters, Elsevier, vol. 93(1), pages 111-115, October.
    2. Hansa Jain, 2019. "Wage–Productivity Relationship in Indian Manufacturing Industries: Evidences from State-level Panel Data," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(3), pages 277-305, August.
    3. 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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    More about this item

    Keywords

    Heterogeneous workers; hierarchical assignment models; monopsonistic competition; wage compression; intra-firm externalities.;
    All these keywords.

    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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