Skills, labour costs and vertically differentiated industries: A general equilibrium analysis
The effect of labour costs on industry profits, employment and labour income is at the heart of the current European debate on industry competitiveness. High wages paid in European countries such as Germany are generally considered harmful for industry profitability. Though, high wages appear also to be associated with high labour skills and then with superior product quality. Similarly, a reduction in labour taxes is often invoked as a tool to improve industry profitability, but this argument hardly takes into account the demand effects of such a tax reform. In this paper we analyse the trade-off between labour costs and industry profits by means of a simple general equilibrium model where one industry is oligopolistic and vertically differentiated. The manufacturing of products of a higher quality requires the employment of a larger amount of skilled labour. Given an underlying skills distribution, the model determines profits, wages and aggregate income and welfare. Results show that high net wages due to a low skills endowment in the economy are typically associated with low profits. Labour taxation unambiguously raises gross wages, but has little effect on net wages. Depending on how the tax revenue is redistributed, higher taxation may either depress or boost industry profits.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.zei.de/
More information through EDIRC
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.:
- Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
- Courakis, Anthony S, 1991. "Labour Skills and Human Capital in the Explanation of Trade Patterns," Oxford Economic Papers, Oxford University Press, vol. 43(3), pages 443-62, July.
- Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
- Katsoulacos, Y., 1984. "Product innovation and employment," European Economic Review, Elsevier, vol. 26(1-2), pages 83-108.
- Kevin M.Shleifer Murphy & Andrei, 1991.
"Quality and Trade,"
University of Chicago - George G. Stigler Center for Study of Economy and State
66, Chicago - Center for Study of Economy and State.
- Gabszewicz, J. & Turrini, A., 2000. "Workers' skills, product quality and industry equilibrium," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 575-593, May.
- Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
- Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
- Claude dâ€™ASPREMONT & Rodolphe DOS SANTOS FERREIRA & Louis-AndrÃ© GÃ‰RARD-VARET, 1989.
"Unemployment in a Cournot Oligopoly Model with Ford Effects,"
Discussion Papers (REL - Recherches Economiques de Louvain)
1989012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- dâ€™ASPREMONT, Cl. & DOS SANTOS FERREIRA, R. & GERARD-VARET, L.-A., 1988. "Unemployment in a Cournot oligopoly model with Ford effects," CORE Discussion Papers 1988018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Lionel Fontagné & Michaël Freudenberg & Deniz Ünal, 1995. "Régionalisation et échanges de biens intermédiaires," Working Papers 1995-11, CEPII research center.
- Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
- Lionel Fontagné & Michaël Freudenberg & Nicolas Peridy, 1997. "Trade Patterns Inside the Single Market," Working Papers 1997-07, CEPII research center.
- Lutz, Stefan, 1996.
"Trade Effects of Minimum Quality Standards with and without Deterred Entry,"
CEPR Discussion Papers
1384, C.E.P.R. Discussion Papers.
- H. Lutz, Stefan, 2000. "Trade Effects of Minimum Quality Standards with and without Deterred Entry," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 314-344.
- Copeland, Brian R. & Kotwal, Ashok, 1996. "Product quality and the theory of comparative advantage," European Economic Review, Elsevier, vol. 40(9), pages 1745-1760, December.
- repec:sae:niesru:v:111:y::i:1:p:48-61 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:zbw:zeiwps:b261999. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.