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Product Market Competition Returns to Skill and Wage Inequality

  • María Guadalupe

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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0686.

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Date of creation: May 2005
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Handle: RePEc:cep:cepdps:dp0686
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