Firms and inequality when unemployment is high

Ihsaan Bassier

CEP Discussion Papers from Centre for Economic Performance, LSE

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)
Date: 2022-10-07
New Economics Papers: this item is included in nep-bec, nep-dev and nep-lma
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Citations: View citations in EconPapers (2)

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