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Worker Heterogeneity, Intra-firm Externalities and Wage Compression

Booth, Alison L and Zoega, Gylfi (2005) Worker Heterogeneity, Intra-firm Externalities and Wage Compression. Working Paper. Birkbeck Working Papers in Economics and Finance 0515.

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We develop a model of monopsonistic wage competition with heterogenous worker ability and intra-firm production complementarities. We use this to illustrate the conditions under which: (i) the divergence between wages and productivity is an equilibrium phenomena; and (ii) this divergence is increasing in worker ability. While the first result is well-known, the second is new. It derives from the intra-firm externalities that, it has sometimes been argued, justify a firm's existence. We show how the model can be used to explain a number of empirical regularities that have hitherto been viewed as puzzles. We then confirm the empirical relevance of our model using new establishment-level data.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Heterogeneous workers; hierarchical assignment models; monopsonistic competition; wage compression;
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 18 Jul 2012 12:17
Last Modified: 18 Jul 2012 12:17

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