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Workplaces in the Primary Economy and Wage Pressure in the Secondary Labor Market

  • Falkinger, Josef


    (University of Zurich)

  • Grossmann, Volker


    (University of Fribourg)

This paper develops a two-sector general equilibrium model in which firms in the primary economy have to create workplaces prior to production and product market competition. For this, we introduce the endogenous sunk cost approach with two-stage decisions of firms from IO in the macro-labor literature. By hypothesizing that technological change has lowered marginal costs but has raised organizational requirements for installing workplaces, we are capable to explain downsizing of low-skilled jobs in the primary economy despite wage flexibility ex ante. This leads to more accentuated labor market segmentation, i.e. an increase in wage pressure in the secondary economy.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 523.

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Length: 33 pages
Date of creation: Jul 2002
Date of revision:
Publication status: published in: Journal of Institutional and Theoretical Economics, 2003, 159 (3), 523-544
Handle: RePEc:iza:izadps:dp523
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  1. Grossmann Volker, 2002. "Quality Improvements, the Structure of Employment, and the Skill-bias Hypothesis Revisited," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-25, April.
  2. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
  3. Galor, Oded & Tsiddon, Daniel, 1997. "Technological Progress, Mobility, and Economic Growth," American Economic Review, American Economic Association, vol. 87(3), pages 363-82, June.
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  5. Shouyong Shi, 1998. "Product Market and the Size-Wage Differential," Working Papers 972, Queen's University, Department of Economics.
  6. Gilles Saint-Paul, 1994. "Are the Unemployed Unemployable?," IMF Working Papers 94/64, International Monetary Fund.
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  8. Joshua Aizenman & Pierre-Richard Agénor, 1994. "Technological Change, Relative Wages, and Unemployment," IMF Working Papers 94/111, International Monetary Fund.
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  10. Huw Lloyd-Ellis, 1999. "Endogenous Technological Change and Wage Inequality," American Economic Review, American Economic Association, vol. 89(1), pages 47-77, March.
  11. Acemoglu, D., 1997. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," Working papers 97-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Erik Brynjolfsson & Lorin M. Hitt, 2000. "Beyond Computation: Information Technology, Organizational Transformation and Business Performance," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 23-48, Fall.
  13. Gilles Saint-Paul, 2001. "On the Distribution of Income and Worker Assignment under Intrafirm Spillovers, with an Application to Ideas and Networks," Journal of Political Economy, University of Chicago Press, vol. 109(1), pages 1-37, February.
  14. Oded Galor & Omer Moav, 2000. "Ability-Biased Technological Transition, Wage Inequality, And Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 469-497, May.
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  17. 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.
  18. Stephen Machin & John Van Reenen, 1998. "Technology and changes in skill structure: evidence from seven OECD countries," IFS Working Papers W98/04, Institute for Fiscal Studies.
  19. Gautier, Pieter A, 2002. "Unemployment and Search Externalities in a Model with Heterogeneous Jobs and Workers," Economica, London School of Economics and Political Science, vol. 69(273), pages 21-40, February.
  20. repec:oup:qjecon:v:113:y:1998:i:4:p:1215-1244 is not listed on IDEAS
  21. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
  22. 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.
  23. Paul R. Krugman, 1994. "Past and prospective causes of high unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 23-43.
  24. Hartmut Egger & Volker Grossmann, 2005. "The Double Role Of Skilled Labor, New Technologies And Wage Inequality," Metroeconomica, Wiley Blackwell, vol. 56(1), pages 37-57, 02.
  25. Kenneth R. Troske & Kimberly Bayard, 1999. "Examining the Employer-Size Wage Premium in the Manufacturing, Retail Trade, and Service Industries Using Employer-Employee Matched Data," American Economic Review, American Economic Association, vol. 89(2), pages 99-103, May.
  26. Das, Satya P., 2001. "Trade and relative wages: The role of supervisory function by skilled workers," European Economic Review, Elsevier, vol. 45(1), pages 45-65, January.
  27. repec:oup:qjecon:v:112:y:1997:i:1:p:291-303 is not listed on IDEAS
  28. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
  29. Murphy, Kevin M & Topel, Robert H, 1997. "Unemployment and Nonemployment," American Economic Review, American Economic Association, vol. 87(2), pages 295-300, May.
  30. Gregg, Paul & Manning, Alan, 1997. "Skill-biassed change, unemployment and wage inequality," European Economic Review, Elsevier, vol. 41(6), pages 1173-1200, June.
  31. Lindbeck, Assar & Snower, Dennis J, 2000. "Multitask Learning and the Reorganization of Work: From Tayloristic to Holistic Organization," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 353-76, July.
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