Industry Concentration and Wage Inequality: a Directed Technical Change Approach

Despite several theoretical approaches linking rising market power to more income inequality, a theoretical-based empirical quantification of this relationship has not been made. We devised a directed technical change model and characterize this relationship. To test our model, we calculate concentration indexes and relate them with skill-premium using industry data per country for 40 countries from 1995 to 2011. In general, we show a negative and robust relationship between the market power index and wage inequality. Additional evidence shows that results tend to be different for countries with different income levels and for different initial values of skill-premium and market power.