Working Paper: CEPR ID: DP7981
Authors: Jacques-François Thisse; Eric Toulemonde
Abstract: Recent empirical contributions in labor economics suggest that individual firms face upward sloping labor supplies. We rationalize this by assuming that idiosyncratic non-pecuniary conditions interact with money wages in workers? decisions to work for specific firms. Likewise, firms supply differentiated goods in response to differences in consumer tastes. Hence, firms are price-makers and wage-setters. By combining monopolistic and monopsonistic competition, our setting captures general equilibrium interactions between the two markets. The equilibrium involves double exploitation of labor. Compared to the competitive outcome, the high-productive workers are overpaid under free entry, whereas the low-productive workers are underpaid. In the same vein, capital-owners receive a premium, whereas workers are exploited.
Keywords: Labor exploitation; Monopolistic competition; Monopsonistic competition; Wage dispersion; Worker heterogeneity
JEL Codes: D33; J31; J42; J71; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms have monopsony power (J42) | wages set below workers' marginal value product (J31) |
| Interaction between product market pricing and labor market wages (F16) | double exploitation of workers (J82) |
| Entry of new firms (L26) | wage levels and income transfers between different types of workers (J31) |
| Double exploitation of labor (J82) | high-productive workers overpaid and low-productive workers underpaid (J31) |
| Wage dispersion arises from workers' heterogeneity in preferences (J31) | firms exploit this preference heterogeneity (D22) |
| Free entry eliminates profits (D41) | exploitation of workers continues (J82) |
| Technological shocks benefiting high-skilled workers (J24) | exacerbation of wage inequality (F66) |