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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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  1. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
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  10. Daron Acemoglu, 1999. "Patterns of Skill Premia," NBER Working Papers 7018, National Bureau of Economic Research, Inc.
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  14. Matthew F. Mitchell, 2001. "Specialization and the skill premium in the 20th century," Staff Report 290, Federal Reserve Bank of Minneapolis.
  15. Boeri, Tito & Nicoletti, Giuseppe & Scarpetta, Stefano, 2000. "Regulation And Labour Market Performance," CEPR Discussion Papers 2420, C.E.P.R. Discussion Papers.
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  17. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  18. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
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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.
  2. Manoj Atolia & Yoshinori Kurokawa, 2014. "Fixed Costs, Task Variety, and Skill Flexibility: A Simple Unified Theory of Below and Within-top Inequality," Tsukuba Economics Working Papers 2014-001, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.

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