Discussion Paper Details

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Title: 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 and wage structure

Programme Area(s): Labour Economics

Abstract: 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.

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Bibliographic Reference

Guadalupe, M. 2004. 'Product Market Competition, Returns to Skill and Wage Inequality'. London, Centre for Economic Policy Research.