Market Power and Wage Inequality

Abstract:

We investigate how market power affects wage inequality. Market power is driven by the market structure of the goods market as well as in the distribution of firm-specific technology. We ask how these contribute to the rise in the Skill Premium, the premium of the average college wage relative over the average non-college wage. We estimate the firm-specific technology as well as the market structure and determine how market power quantitatively affects wage inequality. We also find that there is a substantial welfare cost from excess inequality due to market power.