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Product Market Competition, Returns to Skill, and Wage Inequality

  • Maria Guadalupe

This article examines the effect of product market competition on firms’ willingness to pay for workers of different skills. Using a panel of UK workers and two different quasi-natural experiments, I show that returns to skill within an industry increase with competition. I also investigate the mechanisms behind this relationship: in addition to the indirect effects that operate through union bargaining and skill-biased technical change, there is evidence for a direct effect of competition beyond those channels. I provide an explanation for this finding based on the relationship between competition and the sensitivity of profits to cost reductions.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?id=doi:10.1086/513299
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 25 (2007)
Issue (Month): ()
Pages: 439-474

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Handle: RePEc:ucp:jlabec:v:25:y:2007:p:439-474
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