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Labor Market Competition and Inequality

Author

Listed:
  • Jose Garcia-Louzao

    (Bank of Lithuania and Vilnius University)

  • Alessandro Ruggieri

    (CUNEF Universidad)

Abstract

Does competition in the labor market affect wage inequality? Standard textbook monopsony models predict that lower employer labor market power reduces wage dispersion. We test this hypothesis using Social Security data from Lithuania. We first fit a two-way fixed effects model to quantify the contribution of worker and firm heterogeneity to wage dispersion and document that the compression of dispersion in firm fixed effects has been the main source of the decline in inequality over the past 20 years. Using a theory-based relationship, we then leverage variation across sectors and over time to show that a 10 percentage point increase in labor market competition leads to a 0.7 percentage point reduction in the variance of firm-specific wage components. A counterfactual exercise using our preferred estimates suggests that the increase in labor market competition can explain at least 15 percent of the observed decline in overall wage inequality.

Suggested Citation

  • Jose Garcia-Louzao & Alessandro Ruggieri, 2023. "Labor Market Competition and Inequality," Bank of Lithuania Working Paper Series 117, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:117
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    References listed on IDEAS

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    More about this item

    Keywords

    Wage inequality; Firm heterogeneity; Monopsony; Labor supply elasticity;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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