Rising concentration and wage inequality

Wage inequality has risen in many countries over recent decades. At the same time, production has become increasingly concentrated in a small number of firms. In this paper, we show that these two phenomena are linked. Theoretically, we show that an increase in consumer price sensitivity will lead to an increase in the sectoral concentration of revenues and employment, as well as an increase in wage dispersion between firms within industries. Empirically, we use industry-level data from 14 European countries over the period 1999–2016 and show robust evidence of a positive and statistically significant correlation between concentration and between-firm wage inequality. We show that this is driven by higher market shares and higher wages in high-productivity firms within more concentrated sectors.