Fixed Cost, Number of Firms, and Skill Premium: An Alternative Source for Rising Wage Inequality

Yoshinori Kurokawa

MPRA Paper from University Library of Munich, Germany

Abstract: The number of firms and the wage inequality increased in U.S. manufacturing industries after the late 1970s and early 1980s, when the so-called "Carter/Reagan deregulation" was implemented. This paper provides a possible theoretical explanation for this observed relationship between the number of firms and the wage inequality on the basis of fixed cost. By modifying a variety model, we show that lowering the fixed cost of entry increases the variety of inputs used by the final good. The skill premium then rises through variety-skill complementarity. Our model also shows that the size of a firm decreases and the real wage of low-skilled labor does not necessarily decline, which are compatible with U.S. observations.

Keywords: Fixed cost; The number of firms; Skill premium; Variety-skill complementarity (search for similar items in EconPapers)
JEL-codes: J31 L13 L51 (search for similar items in EconPapers)
Date: 2008-10-10
New Economics Papers: this item is included in nep-bec and nep-mic
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Journal Article: Fixed cost, number of firms, and skill premium: An alternative source for rising wage inequality (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:14014

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