Monopsony power and workers’ switching costs: Evidence from hospitals in China

Using a Chinese hospital-level data set from 2007 to 2018, we measure the monopsony power of hospitals over health care workers by estimating the labor supply elasticity with a hospital-specific labor demand instrument constructed from the number of emergency department visits. The two-stage least squares estimation results show that hospitals have market power over their employees with an implied labor supply elasticity of 1.14, which implies that the wage accounts for only 53% of the marginal revenue product of labor, significantly below the competitive level. More importantly, we find that hospitals’ monopsony power decreases when physicians have the freedom to practice at other hospitals while retaining their positions in their primary hospitals (multi-sited practice policy). Overall, we find that workers’ cost of switching away from employers explains the degree of monopsony power of employers over workers.