Worker Heterogeneity, Intra-firm Externalities and Wage Compression

Alison Booth and Gylfi Zoega

No 515, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: 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.

Keywords: Heterogeneous workers; hierarchical assignment models; monopsonistic competition; wage compression; intra-firm externalities. (search for similar items in EconPapers)
JEL-codes: J24 J31 J42 (search for similar items in EconPapers)
Date: 2005-10
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Citations: View citations in EconPapers (3)

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https://eprints.bbk.ac.uk/id/eprint/27042 First version, 2005 (application/pdf)

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