Abstract We analyze the role of vertical structure in wage inequality. By constructing general equilibrium models, we consider scenarios with unemployment, full employment, and separated unskilled labor markets. In an economy with unemployment, a reduction in the regulated upstream price will widen wage inequality if the substitution elasticity of factors in the variable cost is sufficiently small. In an economy with full employment, a decrease in the regulated upstream price will expand wage inequality. In an economy with separated unskilled labor markets, the results in the two aforementioned situations still hold. We further discuss how regulated upstream pricing affects social welfare.
Pi et al. (Thu,) studied this question.
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