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CEP discussion paper
Product Market Competition Returns to Skill and Wage Inequality
María Guadalupe
May 2005
Paper No' CEPDP0686:
Full Paper (pdf)

JEL Classification: J31; J33; L22; D21

Tags: wage structure; returns to skill; product market competition

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 relative 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.