Labor Market Competition and Inequality

• Authors: Jose Garcia-Louzao and Alessandro Ruggieri
• BSE Working Paper: 1570 | March 2026
• JEL codes: J31, J42, O15

We exploit a novel opportunity to study the dynamics of wage inequality and labor market competition over the course of economic development. Our context is Lithuania, where two decades of sustained growth and labor market tightening coincided with a substantial decline in wage inequality. We first fit a two-way fixed-effects model with worker and firm heterogeneity and document that the compression of the variance of firm fixed effects has been the main source of the fall in inequality. Guided by a standard dynamic monopsony model, we then estimate firms’ labor supply elasticities and show that labor market competition has increased over the same period. Finally, we construct a shift-share instrument and provide evidence that new job opportunities created by the accession to the European Union in 2004 contributed to the fall in inequality through their impact on labor market competition in Lithuania.