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  4. April 2022
  5. Labor Market Power

Labor Market Power

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Abstract

We develop, estimate, and test a tractable general equilibrium model of oligopsony with differentiated jobs and concentrated labor markets. We estimate key model parameters by matching new evidence on the relationship between firms' local labor market share and their employment and wage responses to state corporate tax changes. The model quantitatively replicates quasi-experimental evidence on imperfect productivity-wage pass-through and strategic wage setting of dominant employers. Relative to the efficient allocation, welfare losses from labor market power are 7.6 percent, while output is 20.9 percent lower. Lastly, declining local concentration added 4 percentage points to labor's share of income between 1977 and 2013.

Citation

Berger, David, Kyle Herkenhoff, and Simon Mongey. 2022. "Labor Market Power." American Economic Review, 112 (4): 1147-93. DOI: 10.1257/aer.20191521

Additional Materials

JEL Classification

  • E25 Aggregate Factor Income Distribution
  • H71 State and Local Taxation, Subsidies, and Revenue
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials
  • J42 Monopsony; Segmented Labor Markets
  • R23 Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics