Market Power, Productivity and Distribution of Wages: Theory and Evidence With Micro Data

IOS Working Papers, No. 387 May 2020

46 Pages Posted: 18 Jun 2020

See all articles by Oleksandr Shepotylo

Oleksandr Shepotylo

Aston University - Aston Business School

Volodymyr Vakhitov

American University Kyiv

Date Written: May 2020

Abstract

The declining labor share in national income and rising inequality over the last four decades raise questions about causes of these trends. In order to explain these trends, we develop theoretical model that links intra-industry distribution of wages to variation in market power of firms. The model predicts that wages depend crucially on the demand side characteristics – they decline with market power if and only if demand elasticity is increasing with firm’s output. Trade liberalization leads to expansion of more productive firms, which also increases their bargaining power, resulting in lower share of wage bill in total revenue. The model predictions are tested on a sample of Ukrainian manufacturing firms in 2001–2007. We document that an increase in firm’s size increases its bargaining power relative to workers. We measure firm level markups, and show that they increase with firm’s output and market size. We find that wage rises with firm’s productivity, but fall with its market power. The results are robust to various model specifications estimated at the firm and industry levels.

Keywords: wage bargaining, wage inequality, heterogeneous firms, productivity, variable markups, international trade, monopolistic competition

JEL Classification: D43, F12, J31

Suggested Citation

Shepotylo, Oleksandr and Vakhitov, Volodymyr, Market Power, Productivity and Distribution of Wages: Theory and Evidence With Micro Data (May 2020). IOS Working Papers, No. 387 May 2020 , Available at SSRN: https://ssrn.com/abstract=3609821 or http://dx.doi.org/10.2139/ssrn.3609821

Oleksandr Shepotylo (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Volodymyr Vakhitov

American University Kyiv ( email )

3, Poshtova Sq
Kyiv, Kyiv 04070
Ukraine
04070 (Fax)

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