The Distribution of Earnings Under Monopsonistic/Polistic Competition
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Centre for Economic Policy Research (CEPR)
Institute for the Study of Labor (IZA); Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences
CEPR Discussion Paper No. DP7981
Recent empirical contributions in labor economics suggest that individual firms face upward sloping labor supplies. We rationalize this by assuming that idiosyncratic non-pecuniary conditions interact with money wages in workers decisions to work for specific firms. Likewise, firms supply differentiated goods in response to differences in consumer tastes. Hence, firms are price-makers and wage-setters. By combining monopolistic and monopsonistic competition, our setting captures general equilibrium interactions between the two markets. The equilibrium involves double exploitation of labor. Compared to the competitive outcome, the high-productive workers are overpaid under free entry, whereas the low-productive workers are underpaid. In the same vein, capital-owners receive a premium, whereas workers are exploited.
Number of Pages in PDF File: 18
Keywords: labor exploitation, monopolistic competition, monopsonistic competition, wage dispersion, worker heterogeneity
JEL Classification: D33, J31, J42, J71, L13
Date posted: August 25, 2010
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