Discussion paper

DP4434 Product Market Competition, Returns to Skill and Wage Inequality

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.


Guadalupe, M (2004), ‘DP4434 Product Market Competition, Returns to Skill and Wage Inequality‘, CEPR Discussion Paper No. 4434. CEPR Press, Paris & London. https://cepr.org/publications/dp4434