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Worker Heterogeneity, Intra-firm Externalities and Wage Compression

  • Alison L Booth
  • Gylfi Zoega

    (Department of Economics, Mathematics & Statistics, Birkbeck)

We develop a model of monopsonistic wage competition with heterogenous worker ability and intra-firm production complementarities. We use this to illustrate the conditions under which: (i) the divergence between wages and productivity is an equilibrium phenomena; and (ii) this divergence is increasing in worker ability. While the first result is well-known, the second is new. It derives from the intra-firm externalities that, it has sometimes been argued, justify a firm's existence. We show how the model can be used to explain a number of empirical regularities that have hitherto been viewed as puzzles. We then confirm the empirical relevance of our model using new establishment-level data.

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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0515.

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Date of creation: Oct 2005
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Handle: RePEc:bbk:bbkefp:0515
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