The Wage Premium and Market Structure

Abstract

In this paper, we seek to understand why the “wage premium”, the percentage by which wages earned by skilled workers exceed those of unskilled workers, varies among industries featuring different market competitiveness. We construct a theoretical model with CES utility function and constant return to scale production function that allows us to examine the effects of different imperfect market structures (monopolistic competition and oligopoly) on the wage premium. We find that the wage premium is higher under oligopoly than under monopolistic competition. Our findings are supported by empirical evidence from Chilean manufacturers.

Keywords: Market structure; oligopoly; monopolistic competition; relative factor endowment; wage premium