DP4434 Product Market Competition, Returns to Skill and Wage Inequality

Author(s): Maria Guadalupe
Publication Date: June 2004
Keyword(s): product market competition, returns to skill, wage structure
JEL(s): D21, J31, J33, L22
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4434

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 the dispersion of 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.