Firms and inequality when unemployment is high

Ihsaan Bassier

Journal of Development Economics, 2023, vol. 161, issue C

Abstract: How important are firms for wage inequality in developing countries where structural unemployment is high? Research focused on contexts close to full employment has suggested a substantial role of firms in labor market inequality. Using matched employer–employee data from South Africa, I find that firms explain a larger share of wage variation than in richer countries. I consider drivers of this, documenting first a higher productivity dispersion as found for other developing countries. Secondly, I estimate the separations elasticity by instrumenting wages of matched workers with firm wages, and I find a low separations elasticity. This generates a high degree of monopsony, and the correspondingly high estimated rent-sharing elasticity helps explain the important role of firm wage policies in inequality. Monopsony may be driven by higher unemployment, and regional heterogeneity provides suggestive evidence for this. Such firm-level competitive dynamics may exacerbate inequality in developing countries more generally.

Keywords: Inequality; Firm wage premia; Unemployment; Monopsony (search for similar items in EconPapers)
JEL-codes: D31 J31 J42 J63 J64 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:161:y:2023:i:c:s0304387822001717

DOI: 10.1016/j.jdeveco.2022.103029

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