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Labor Market Power and the Effects of Fiscal Policy

Author

Listed:
  • Christian Bredemeier

    (University of Wuppertal and IZA)

  • Babette Jansen

    (University of Antwerp)

  • Roland Winkler

    (Friedrich Schiller University Jena, and University of Antwerp)

Abstract

We propose a new fiscal transmission channel based on countercyclical monopsony power in the labor market. We develop a Two-Agent New Keynesian model incorporating a time-varying degree of monopsony power, with workers valuing various job aspects and firms having wage-setting power, inversely related to the elasticity of labor supply to individual firms. As government spending increases, labor supply to individual firms becomes more elastic, creating more competition, larger fiscal multipliers, and stronger distributional consequences. We examine this channel's interactions with other fiscal transmission channels. Finally, we confirm empirically the model's prediction of reduced employer market power following government spending expansions.

Suggested Citation

  • Christian Bredemeier & Babette Jansen & Roland Winkler, 2023. "Labor Market Power and the Effects of Fiscal Policy," Jena Economics Research Papers 2023-015, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2023-015
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2023/wp_2023_015.pdf
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    More about this item

    Keywords

    fiscal policy; labor-market monopsony; income inequality;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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