The Distribution of Earnings Under Monopsonistic/Polistic Competition

18 Pages Posted: 24 Aug 2010

See all articles by Jacques-François Thisse

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Eric Toulemonde

IZA Institute of Labor Economics; Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences

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Abstract

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. Our setting combines monopolistic and monopsonistic competition, thus encapsulating 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.

Keywords: worker heterogeneity, monopsonistic competition, monopolistic competition, labor exploitation, wage dispersion

JEL Classification: D33, J31, J42, J71, L13

Suggested Citation

Thisse, Jacques-François and Toulemonde, Eric, The Distribution of Earnings Under Monopsonistic/Polistic Competition. IZA Discussion Paper No. 5136. Available at SSRN: https://ssrn.com/abstract=1663176

Jacques-François Thisse (Contact Author)

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Eric Toulemonde

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Facultés Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium
+32 81 725 313 (Phone)
+32 81 724 840 (Fax)

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