Market Power, Productivity and Wage Determination : Ukrainian Firm Level Evidence

We develop a theoretical model that explains intra-industry distribution of wages with variation in market power of firms, along with traditional variation in productivity. The model predicts that the outcome of the bargaining game between the firm owners and employees depends crucially on the demand side characteristics. As a result, variation in the firms' markups serves as an important determinant of wage distribution. We provide micro foundations for this channel of wage determination.We test the model on the sample of Ukrainian firm-level data. We find that the average wage rises with an increase of the firm productivity, but falls with an increase of the market power. These effects are roughly of the same size in absolute value; the results are statistically significant and robust to various model specifications estimated at the firm or industry level