Shutdown Threats, Firm Fragmentation and the Skill Premium

Klas Sandén ()
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Klas Sandén: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG

No 265, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This essay investigates the interaction between demand uncertainty and non-competitive labor markets where firm owners have the option to shut down and relocate. Workers cannot find new jobs instantly and therefore accept wage reductions to avoid unemployment, if firm owners credibly threaten to shut down. The analysis shows that the expected wage rate is a mix of a competitive wage rate and a bargained wage rate and that this lowers the skill premium. Further, the option of firms to shut down and relocate increases the average size of firms. The analysis also shows that outsourcing or contracting out is more likely if demand is more uncertain, if market power is smaller, and if the markets for intermediate goods are more competitive. Fragmentation increases the skill premium because it leads to more homogenous firms, with respect to workers’ skills. With more homogenous firms, low-skill workers cannot compensate their inferior productivity in wage bargains with high-skill workers.

Keywords: Distribution; Wages; Outsourcing; Fragmentation; Bargaining (search for similar items in EconPapers)
JEL-codes: J24 J31 J41 J52 L23 L24 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2007-09-12
New Economics Papers: this item is included in nep-bec and nep-lab
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