Market Imperfections and Wage Inequality

Abstract

This paper investigates the relationship between various market imperfections and the skill premium. The model in this paper assumes perfectly competitive labor markets but distorted product and financial markets. The model predicts that the skill premium is positively correlated with market power, modeled using preference for variety, and shorter product cycles. The effect from financial market distortions or taxes on financial income is ambiguous. Positive external effects among firms developing new goods decrease the skill premium.