Working Paper: CEPR ID: DP4434
Authors: Maria Guadalupe
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.
Keywords: Product Market Competition; Returns to Skill; Wage Structure
JEL Codes: D21; J31; J33; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher sensitivity of profits to cost reductions in competitive environments (D22) | higher returns to skill (J24) |
| increased product market competition (L19) | higher returns to skill (J24) |
| high-skilled workers rewarded more in competitive sectors (J31) | increased wage differential between high and low-skilled workers (J31) |
| returns to both observed and unobserved skills increase in competitive environments (D29) | within-sector wage inequality (J31) |
| increased product market competition (L19) | greater wage dispersion within skill groups (J31) |