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Product Market Competition, Returns to Skill and Wage Inequality

  • Guadalupe, Maria

    ()

    (INSEAD)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1556.

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Length: 47 pages
Date of creation: Apr 2005
Date of revision:
Publication status: published in: Journal of Labor Economics, 2007, 25 (3), 439-474
Handle: RePEc:iza:izadps:dp1556
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