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Abstract

This paper shows that technological progress also has substantial impact on the nature of competition in labor markets, and that accounting for this impact results in a better understanding of technology-induced changes in workers' relative wages. The paper first presents a simple monopsony model in which firms have wage-setting power because workers are in excess supply, and in which technology not only increases the marginal product of labor but also decreases firms' wage-setting power. As a result, not only average real wages grow but lower-tail wage inequality also decreases, driven by stronger relative wage growth in the lowest-paying firms and a relocation of workers from the lowest-paying to higher-paying firms. These predictions are then tested using unique data between 1846 and 1896 during Belgium’s First and Second Industrial Revolutions, when trade unions and other institutions protecting low-wage workers did not yet exist.


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Citation

Delabastita, V. and M. Goos. 2024. “Technological Progress in Slack Labor Markets”.