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

Kurokawa, Yoshinori (2008): Fixed Cost, Number of Firms, and Skill Premium: An Alternative Source for Rising Wage Inequality.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fixed cost; The number of firms; Skill premium; Variety-skill complementarity
• Subjects: L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials

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