IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Product Market Competition, Returns to Skill and Wage Inequality

  • Guadalupe, Maria



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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

in new window

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
Contact details of provider: Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page:

Order Information: Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Eli Berman & John Bound & Zvi Griliches, 1993. "Changes in the Demand for Skilled Labor within U.S. Manufacturing Industries: Evidence from the Annual Survey of Manufacturing," NBER Working Papers 4255, National Bureau of Economic Research, Inc.
  2. Sandra E Black & Lisa M Lynch & Anya Krivelyova, 2003. "How Workers Fare When Employers Innovate," Working Papers 03-11, Center for Economic Studies, U.S. Census Bureau.
  3. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
  4. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
  5. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  6. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  7. Marianne Bertrand & Francis Kramarz, 2001. "Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry," Working Papers 2001-12, Centre de Recherche en Economie et Statistique.
  8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  9. repec:tpr:qjecon:v:120:y:2005:i:2:p:701-728 is not listed on IDEAS
  10. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, 09.
  11. repec:oup:qjecon:v:107:y:1992:i:1:p:255-84 is not listed on IDEAS
  12. Luis Garicano & Esteban Rossi-Hansberg, 2004. "Inequality and the Organization of Knowledge," American Economic Review, American Economic Association, vol. 94(2), pages 197-202, May.
  13. repec:oup:restud:v:67:y:2000:i:4:p:635-66 is not listed on IDEAS
  14. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  15. Caroli, Eve & Van Reenen, John, 1999. "Skill biased organizational change? Evidence from a panel of British and French establishments," CEPREMAP Working Papers (Couverture Orange) 9917, CEPREMAP.
  16. Francine D. Blau & Lawrence M. Kahn, 2001. "Do Cognitive Test Scores Explain Higher US Wage Inequality?," NBER Working Papers 8210, National Bureau of Economic Research, Inc.
  17. repec:tpr:qjecon:v:116:y:2001:i:4:p:1449-1492 is not listed on IDEAS
  18. David Card, 1986. "The Impact of Deregulation on the Employment and Wages of Airline Mechanics," NBER Working Papers 1847, National Bureau of Economic Research, Inc.
  19. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  20. repec:oup:qjecon:v:110:y:1995:i:4:p:1075-1110 is not listed on IDEAS
  21. Aghion, Philippe & Schankerman, Mark, 1999. "Competition, Entry, and the Social Returns to Infrastructure in Transition Economies," CEPR Discussion Papers 2052, C.E.P.R. Discussion Papers.
  22. repec:oup:qjecon:v:113:y:1998:i:4:p:1169-1213 is not listed on IDEAS
  23. repec:oup:qjecon:v:116:y:2001:i:4:p:1449-1492 is not listed on IDEAS
  24. Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers W01/12, Institute for Fiscal Studies.
  25. repec:oup:qjecon:v:118:y:2003:i:3:p:879-907 is not listed on IDEAS
  26. David Card, 1996. "Deregulation and Labor Earnings in the Airline Industry," NBER Working Papers 5687, National Bureau of Economic Research, Inc.
  27. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  28. Sandra E. Black & Philip E. Strahan, 2001. "The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry," American Economic Review, American Economic Association, vol. 91(4), pages 814-831, September.
  29. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  30. Marianne Bertrand, 2004. "From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 723-766, October.
  31. repec:tpr:qjecon:v:117:y:2002:i:4:p:1369-1413 is not listed on IDEAS
  32. David Card & Thomas Lemieux & W. Craig Riddell, 2004. "Unions and Wage Inequality," Journal of Labor Research, Transaction Publishers, vol. 25(4), pages 519-562, October.
  33. Philippe Aghion & Mark Schankerman, 1999. "Competition, entry and the social returns to infrastructure in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 79-101, March.
  34. repec:oup:qjecon:v:109:y:1994:i:2:p:367-97 is not listed on IDEAS
  35. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  36. Nicole M. Fortin & Thomas Lemieux, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 75-96, Spring.
  37. Hirsch, Barry T, 1993. "Trucking Deregulation and Labor Earnings: Is the Union Premium a Compensating Differential?," Journal of Labor Economics, University of Chicago Press, vol. 11(2), pages 279-301, April.
  38. repec:oup:qjecon:v:104:y:1989:i:4:p:635-54 is not listed on IDEAS
  39. David Card & John E. DiNardo, 2002. "Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," NBER Working Papers 8769, National Bureau of Economic Research, Inc.
  40. David Card, 2001. "The Effect of unions on wage inequality in the U.S. labor market," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 54(2), pages 296-315, January.
  41. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  42. Card, David, 1996. "The Effect of Unions on the Structure of Wages: A Longitudinal Analysis," Econometrica, Econometric Society, vol. 64(4), pages 957-79, July.
  43. Hirsch, Barry T & Macpherson, David A, 2000. "Earnings, Rents, and Competition in the Airline Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 125-55, January.
  44. Vicente Cuñat & Maria Guadalupe, 2004. "Executive compensation and product market competition," LSE Research Online Documents on Economics 19985, London School of Economics and Political Science, LSE Library.
  45. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  46. Amable, Bruno & Gatti, Donatella, 2002. "Macroeconomic effects of product market competition in a dynamic efficiency wage model," Economics Letters, Elsevier, vol. 75(1), pages 39-46, March.
  47. Rose, Nancy L, 1987. "Labor Rent Sharing and Regulation: Evidence from the Trucking Industry," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1146-78, December.
  48. Machin, Stephen, 1997. "The decline of labour market institutions and the rise in wage inequality in Britain," European Economic Review, Elsevier, vol. 41(3-5), pages 647-657, April.
  49. repec:oup:restud:v:66:y:1999:i:3:p:529-54 is not listed on IDEAS
  50. repec:oup:qjecon:v:111:y:1996:i:1:p:195-226 is not listed on IDEAS
  51. repec:oup:qjecon:v:108:y:1993:i:4:p:983-1014 is not listed on IDEAS
  52. repec:tpr:qjecon:v:119:y:2004:i:1:p:249-275 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp1556. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.