Strategic Labor Market Equilibrium in the Context of Monopolistic Competition

The current research develops the concept of strategic labor market equilibrium, and attempts to explain the income inequality by the wage differentials, which emerge as a result of strategic behavior of agents. A two-sector model is constructed, where the first sector is monopolistically competitive (manufacturing), and the second sector is perfectly competitive (agricultural). Consumers' preferences are given by a two-tier utility function of the form Kobb-Douglas over CES. The entrepreneurs in the manufacturing sector are heterogeneous in entrepreneurial skills, the workers are heterogeneous in their endowments of labor. The labor markets in both sectors are endogenous, and each worker's objective is to choose the workplace as a mixed strategy as to maximize their expected wage rate. In equilibrium, the wage rate in the manufacturing sector equalizes. If the economy is large, then the wage rate in the manufacturing sector is less than that in the agricultural sector, and the most successful firms tend to accumulate the most productive workers. If the economy is small, then otherwise, the wage rate in the manufacturing sector is higher, and the most successful firms will accumulate the least productive workers. The seemingly paradoxical interrelations of the wage rates are explained by the competitiveness of the labor market. Numerical simulations yield that in the large economy, a value of beta (the elasticity of utility w.r.t. consumption of the agricultural good) could be deduced as to minimize the income inequality among workers, whose variation in beta decreases as the market size grows. In the small economy, the income inequality among workers appears to decrease with beta.