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Fixed Cost, Number of Firms, and Skill Premium: An Alternative Source for Rising Wage Inequality

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  • Kurokawa, Yoshinori

Abstract

The number of firms and the wage inequality increased in U.S. manufacturing industries after the late 1970s and early 1980s, when the so-called "Carter/Reagan deregulation" was implemented. This paper provides a possible theoretical explanation for this observed relationship between the number of firms and the wage inequality on the basis of fixed cost. By modifying a variety model, we show that lowering the fixed cost of entry increases the variety of inputs used by the final good. The skill premium then rises through variety-skill complementarity. Our model also shows that the size of a firm decreases and the real wage of low-skilled labor does not necessarily decline, which are compatible with U.S. observations.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14014.

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Date of creation: 10 Oct 2008
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Handle: RePEc:pra:mprapa:14014

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Keywords: Fixed cost; The number of firms; Skill premium; Variety-skill complementarity;

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Cited by:
  1. Zhang, Jingjing, 2012. "Inflow of labour, producer services and wage inequality," Economics Letters, Elsevier, vol. 117(3), pages 600-603.

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