Bank of Lithuania
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No 117

Labor Market Competition and Inequality

  • Abstract

    Does competition in the labor market affect wage inequality? Standard textbook monopsony models predict that lower employer labor market power reduces wage dispersion. We test this hypothesis using Social Security data from Lithuania. We first fit a two-way fixed effects model to quantify the contribution of worker and firm heterogeneity to wage dispersion and document that the compression of dispersion in firm fixed effects has been the main source of the decline in inequality over the past 20 years. Using a theory-based relationship, we then leverage variation across sectors and over time to show that a 10 percentage point increase in labor market competition leads to a 0.7 percentage point reduction in the variance of firm-specific wage components. A counterfactual exercise using our preferred estimates suggests that the increase in labor market competition can explain at least 15 percent of the observed decline in overall wage inequality.

    Keywords: Wage inequality, Firm heterogeneity, Monopsony, Labor supply elasticity.
    JEL Classification: J31, J42, O15.

No 102

Dual Returns to Experience

  • Abstract

    In this paper we study how labor market duality affects human capital accumulation and wage trajectories of young workers. Using rich administrative data for Spain, we follow workers since their entry into the labor market to measure experience accumulated under different contractual arrangements and we estimate their wage returns. We document lower returns to experience accumulated in fixed-term contracts compared to permanent contracts and show that this difference is not due to unobserved firm heterogeneity or match quality. Instead, we provide evidence that the gap in returns is due to lower human capital accumulation while working under fixed-term contracts. This difference widens with worker ability, in line with skill-learning complementarity. Our results suggest that the widespread use of fixed-term work arrangements reduces skill acquisition of high-skilled workers, holding back life-cycle wage growth by up to 16 percentage points after 15 years since labor market entry.

    Keywords: labor market duality, human capital, earnings dynamics.

    JEL codes: J30, J41, J63.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.