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Labor market competition and inequality

Author

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  • Garcia-Louzao, Jose
  • Ruggieri, Alessandro

Abstract

We exploit a novel opportunity to study the dynamics of wage inequality and labor market competition over the course of economic development. Our context is Lithuania, where two decades of sustained growth and labor market tightening coincided with a substantial decline in wage inequality. We first fit a two-way fixed-effects model with worker and firm heterogeneity and document that the compression of the variance of firm fixed effects has been the main source of the fall in inequality. Guided by a standard dynamic monopsony model, we then estimate firms’ labor supply elasticities and show that labor market competition has increased over the same period. Finally, we construct a shift-share instrument and provide evidence that new job opportunities created by the accession to the European Union in 2004 contributed to the fall in inequality through their impact on labor market competition in Lithuania.

Suggested Citation

  • Garcia-Louzao, Jose & Ruggieri, Alessandro, 2026. "Labor market competition and inequality," Journal of Development Economics, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:deveco:v:183:y:2026:i:c:s0304387826001045
    DOI: 10.1016/j.jdeveco.2026.103821
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    Keywords

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    JEL classification:

    • 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
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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