Working Paper: CEPR ID: DP17569
Authors: Shubhdeep Deb; Jan Eeckhout; Aseem Patel; Lawrence Warren
Abstract: We propose a theory of how market power affects wage inequality. We ask how goods and labor market power jointly affect the level of wages, the Skill Premium, and wage inequality. We then use detailed microdata from the US Census between 1997 and 2016 to estimate the parameters of labor supply, technology and the market structure. We find that a less competitive market structure lowers the wage level, contributes 7% to the rise in the Skill Premium and accounts for half of the increase in between-establishment wage variance.
Keywords: market power; wage inequality; skill premium; technological change; market structure; endogenous markups; endogenous markdowns
JEL Codes: C6; D3; D4; D5; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Less competitive market structure (L19) | Reduction in wage level (J31) |
| Less competitive market structure (L19) | Rise in skill premium (J24) |
| Less competitive market structure (L19) | Increase in between-establishment wage variance (J39) |
| Market power in goods and labor markets (J42) | Wages set above marginal costs (J31) |
| Market power in goods and labor markets (J42) | Reduction in demand for labor (J23) |
| Reduction in demand for labor (J23) | Reduction in wage level (J31) |
| Monopsony power (J42) | Hire workers at wages lower than marginal revenue product (F16) |
| Output market power (D43) | Diminished equilibrium demand for labor (J29) |