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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. Simeon Djankov & Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "The Regulation of Entry," Working Paper 19462, Harvard University OpenScholar.
  2. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and the U.S. employment miracle," Economics Working Papers 930, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006.
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  6. Matthew F. Mitchell, 2001. "Specialization and the skill premium in the 20th century," Staff Report 290, Federal Reserve Bank of Minneapolis.
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  12. Daron Acemoglu, 1999. "Patterns of Skill Premia," NBER Working Papers 7018, National Bureau of Economic Research, Inc.
  13. Thomas J. Holmes & Matthew F. Mitchell, 2003. "A Theory of Factor Allocation and Plant Size," NBER Working Papers 10079, National Bureau of Economic Research, Inc.
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  15. Zhu, Susan Chun & Trefler, Daniel, 2005. "Trade and inequality in developing countries: a general equilibrium analysis," Journal of International Economics, Elsevier, vol. 65(1), pages 21-48, January.
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  17. 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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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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