Wages and the Structure of Product Markets

Abstract

EMPERICAL STUDIES show a pattern of inter-industry wage differentials in which all workers in certain industries, irrespective of their personal characteristics, are paid higher wages than comparable workers in other industries (see Dickens and Katz, 1987:48-89 for a survey). These wage differentials have been found to persist over time (Cullen, 1956; Thaler, 1989:182). Furthermore, higher wages seem to be positively correlated with certain characteristics of industry, in particular concentration in product markets (Mellow, 1983;Kwoka, 1983;Long and Link, 1983). These empirical findings suggest that the structure of product markets could be an important factor contributing to inter-industry wage differentials. The empirical validity of the relationship between concentration in industry and wages is accepted by all schools of thought within the field of labour economics. Yet, theoretical attempts to explain these findings are numerous and diverse. The bone of contention seems to be whether the inter-industry wage differential reflects a skill differential and thus so-called rational economic behaviour by high wage industries, or whether higher wages are the result of power plays and strategic manipulation by firms with product market power (Weiss, 1966;Ryan, 1981) . An important related issue is whether the link between product market structure and labour market outcomes reflects a need for intervention in the product market. Labour economics is, however, not the only branch of economics with an interest in the effects of market structure on the behaviour and performance of firms or industries. Scholars in industrial economics have studied the link between competition or monopoly power and product market outcomes such as prices and profits. There is al-so much debate about the direction of causality between market structure, behaviour and performance. This paper argues that valuable insights 1995 SAJE v63 (1) p2 can be obtained from this debate in industrial economics by identifying, ordering, and systemizing the various lines of argument within the labour economics field about the link between product market structure and labour market outcomes. The paper demonstrates, firstly, that the debate on the link between concentration and wages is a debate about the direction of causality between industrial structure, industry or firm wage setting behaviour, and industry or firm performance. Secondly, the paper maintains that the line of argument reflected in opposing views within this debate shows strong resemblance to the opposing views in the debate in industrial economics about the causality between concentration, product market behaviour and performance. The debate in industrial economics on the causal relationship between market structure and product market performance accordingly provides a framework for a new and more coherent analysis of the debate in labour economics about the relationship between market structure and labour market out-comes. Lastly, the paper argues that the causal relation between concentra...

Monopoly and Profits versus Monopoly and Wages: Two Sides of a Coin?

“…The monopoly-profit debate in industrial economics and the monopoly-wage debate in labour economics are two sides of the same coin. The analysis in this paper clearly indicates that the similarities between the two debates involve much more than the broad issues identified by Smit (1995). The assumptions, propositions and substantive lines of argument of structuralists and anti-structuralists in both debates also are remarkably similar.…”

“…These are (a) institutionalists and segmentationists who emphasise a direct and causal relationship; and (b) neo-classical economists who, at most, acknowledge an indirect, non-causal relationship. In Smit (1995) it was shown that, in terms of broad outlines, these opposing views closely resemble those in the industrial economics debate. First, the opposing arguments about the causality between product market structure and labour market behaviour is similar to that in industrial economics with regard to product 1998 SAJE v66(3) p393 market structure and product market behaviour.…”

“…In the labour economics debate on the causes of inter-industry wage differentials two main views exist on the causality between product market structure and labour market behaviour and performance (see Smit 1995). These are (a) institutionalists and segmentationists who emphasise a direct and causal relationship; and (b) neo-classical economists who, at most, acknowledge an indirect, non-causal relationship.…”

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The association between market concentration and profits is a central bone of contention in the industrial economics literature. An earlier study (Smit 1995) demonstrated that the contours and divisions in the labour economics monopoly-wage debate closely resemble those in the industrial economics monopoly-profit debate despite the fact that the two debates are being conducted somewhat in relative isolation from each other. This paper takes the analysis of these parallels between the monopoly-wage debate and the monopoly-profit debate further by raising three questions: (a) How far does the resemblance between these two debates stretch?

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Concentration, Labour Quality and Wages in the South Concentration, Labour African Manufacturing Sector

“…The limits of this broader debate in the labour economics field, which can be broadly construed as taking place between structuralists (dual economists and institutionalists) and neo-classical economists, are defined by views on the relevance of non-competitiveness in product markets for labour market outcomes. In essence, disagreement centres on how much weight to give to efficiency and market power in interpreting the effect of seller concentration on wages (Smit 1995). Institutionalists and dual economy theorists emphasise a direct association between variables reflecting product market structure -such as concentration -and inter-industry wage differentials.…”