The Distribution of Earnings Under Monopsonistic/Polistic Competition

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