Competition, firm Size and returns to skills : evidence from currency shocks and market liberalization

The authors investigate the impact of exogenous product market competition shocks on returns to skills in Italy using a new longitudinal dataset on individual working histories. This impact is identified using three exogenous shocks affecting competition: the unforeseen devaluation of the Lira in 1992, its return to a fixed exchange regime in 1996 and the market liberalisation in the utility and transport sectors in the late 1990s‐early 2000s. This paper extends the analysis of Guadalupe (2007) by investigating how firm heterogeneity and shocks of different types and signs affect the impact of competition on skill premia. The authors find that opposite shocks have opposite effects: an increase (resp. decrease) in international competition increases (resp. decreases) returns to skills. Moreover, international shocks have greater effects on medium‐sized firms, while domestic liberalisation shocks have greater effects on large incumbents previously sheltered from any entry threat.