The wage premium and market structure: theory and empirical evidence from Chilean manufacturers

Purpose - This paper aims to examine how the “wage premium,” the percentage by which wages earned by skilled workers exceed those of unskilled workers, varies across industries characterized by different levels of competitiveness. Design/methodology/approach - A theoretical model employing constant elasticity of substitution (CES) utility function and constant returns to scale production function is developed and analyzed to derive the effects of industry competitiveness on the wage premium. Econometric methods are applied to Chilean manufacturing data to test implications of theoretical model. Findings - Once the relative factor endowment is being controlled, market competition significantly reduces the wage premium. More specifically, given with the same relative factor endowment, the wage premium is significantly higher under oligopolistic competition than under monopolistic competition. Empirical evidence from Chilean manufacturers supports our theoretical conclusions. Practical implications - During economic development, the reallocation of production factors from unskilled labor-intensive to skilled labor-intensive industries raises the wage premiums received by skilled workers. Besides, skilled workers will earn higher wages by working in more highly concentrated industries instead of more competitive industries. This needs to be considered by government policymakers who must balance promotion of technical change with prevention of extreme the income inequality. Originality/value - This paper examines how market structure affects wage premiums, providing new insights into a well-established literature that largely maintains that wage premiums are primarily a function of relative factor endowments or international trade.