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Abstract
This paper shows that investment in internet infrastructure compresses lower-tail wage inequality. We present a monopsony model with heterogeneous firms in which better job search by workers, due to increased internet access, forcing wages to converge to the competitive wage.This results in larger wage increases for low-wage workers and a reallocation of workers from low-wage to high-wage firms, such that lower-tail wage inequality decreases. We then leverage the liberalization of the telecommunications market in Costa Rica as a natural experiment in a continuous treatment DiD design to show evidence in support of our model. We also show that lower-tail inequality in non-wage job characteristics decreases, and that minimum wages and collective bargaining are unlikely to be alternative explanations for our empirical results.
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