Labor Market Power and Self-Employment Around the World

We estimate the labor market power of manufacturing firms in 82 low- and middle-income countries using over 13,000 observations from a harmonized global dataset. Wage markdowns— the gap between a worker’s marginal revenue product and their wage—vary widely across countries and show a robust hump-shaped association with the share of self-employed workers. We interpret this pattern using a simple oligopsonistic labor market model with frictions, in which self-employment and wage markdowns are jointly determined, and unemployment protection dictates whether their relationship is positive or negative. Consistent with the model, wage markdowns rise with self-employment in countries with such protection, but fall in those without it. These findings underscore how labor market frictions and regulations shape the link between self-employment and labor market power across countries.