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Monopsony Power in the Labor Market

Author

Listed:
  • Jose Azar

    (IESE Business School)

  • Ioana Marinescu

    (University of Pennsylvania)

Abstract

Labor economics often assumes that wages w are equal to the marginal revenue product of labor MRPL. However, recent literature has shown that firms’ market power allows them to pay wages substantially below marginal productivity. The markdown (MRPL − w)/w is our preferred measure of firms’ monopsony power, and captures the percent wage increase that would occur if monopsony power were eliminated. We derive the markdown across three classes of models, each embodying a distinct source of monopsony power. First, in oligopsony models, monopsony power arises from strategic interactions between large firms, and is related to labor market concentration. Second, in job differentiation models, monopsony power arises from workers’ heterogeneous preferences over jobs that differ in wages and amenities. Finally, in search and matching models, it arises from frictions that prevent workers from accessing all existing job vacancies. To identify the markdown, empirical studies often rely on estimating the firm-level labor supply elasticity and taking its inverse as a measure of the markdown. A few studies directly estimate MRPL using a production function approach. Across studies, the markdown typically ranges between 15% and 50% implying that wages would increase by 15 to 50% if firms’ monopsony power were eliminated. Finally, we analyze the policy implications of monopsony power in three areas, drawing on both theory and empirical analysis: merger control in antitrust policy, the regulation of non-competition agreements, and minimum wages. Monopsony power helps explain how mergers and noncompetition agreements can lower wages, and how minimum wages can increase employment. Overall, the literature shows that monopsony power is significant, and should be considered when analyzing policy and the sources of wage variation.

Suggested Citation

  • Jose Azar & Ioana Marinescu, 2024. "Monopsony Power in the Labor Market," RF Berlin - CReAM Discussion Paper Series 2431, Rockwool Foundation Berlin (RF Berlin) - Centre for Research and Analysis of Migration (CReAM).
  • Handle: RePEc:crm:wpaper:2431
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    References listed on IDEAS

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    1. Natarajan Balasubramanian & Jin Woo Chang & Mariko Sakakibara & Jagadeesh Sivadasan & Evan Starr, 2022. "Locked In? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers," Journal of Human Resources, University of Wisconsin Press, vol. 57(S), pages 349-396.
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    More about this item

    Keywords

    monopsony; oligopsony; markdown; wages; labor market concentration; labor supply elasticity; antitrust; mergers; imperfect competition; minimum wage;
    All these keywords.

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