We investigate how market power affects wage inequality. Market power is driven by the market structure of the goods market as well as in the distribution of firm-specific technology.
Abstract
We ask how these contribute to the rise in the Skill Premium, the premium of the average college wage relative over the average non-college wage. We estimate the firm-specific technology as well as the market structure and find that the increase in market power contributes over half to the rise in the skill premium. We also find that there is a substantial welfare cost from excess inequality due to market power.
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- Department of Economics