Monopsonistic Competition for the 'Best' Workers

In this paper we analyse an economy where firms use labour as the only production factor, with constant return to scale. We suppose that jobs differ in their non-wage characteristics so each firm has a monopsonistic power. Mainly, we suppose that workers are heterogeneous with respect to their productivity. Then, each firm has incentives to offer higher wages in order to recruit the most productive workers. The competition among firms leads to a symmetric equilibrium wage which is higher than the reservation wage and to involuntary unemployment for the less productive workers, that are willing to work at the current wage but are not hired because their productivity is lower than the wage level. If firms have no institutional constraint on paying lower wages for the same job, an endogenous labour market segmentation emerges.