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Product Market Competition, Returns to Skill and Wage Inequality

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  • Guadalupe, Maria

    (INSEAD)

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

  • Guadalupe, Maria, 2005. "Product Market Competition, Returns to Skill and Wage Inequality," IZA Discussion Papers 1556, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp1556
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    More about this item

    Keywords

    product market competition; returns to skill; wage structure;
    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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