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Product Market Competition Returns to Skill and Wage Inequality

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  • María Guadalupe

Abstract

This paper shows that increasing product market competition can have a direct impact on the employment relationship and on wage inequality. I develop a simple model in which an increase in product market competition increases returns to skill through the effect of competition on the sensitivity of profits to cost reductions. I then show empirically that relative wages increase with competition using a large panel of United Kingdom workers with complete work histories. I identify the impact of competition on returns to skill in the panel, using two exogenous measures of competition provided by two quasi-natural experiments. Quantile regressions indicate that increased competition also raised returns to unobserved ability.

Suggested Citation

  • María Guadalupe, 2005. "Product Market Competition Returns to Skill and Wage Inequality," CEP Discussion Papers dp0686, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0686
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    More about this item

    Keywords

    Wage Structure; Returns to Skill; Product Market Competition;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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