Monopsony Power and Firm Organization

Monopsony power may be particularly strong in certain hierarchical occupations within firms, and production complementarities between occupations may amplify its adverse effects. To quantify this phenomenon, we extend a general equilibrium oligopsony model to include firm organization. Adding a management layer increases production workers' productivity and overhead costs, so only high-productivity firms hire managers to expand production. Using Portuguese administrative data, we quantify the model and validate it against quasi-experimental evidence on demand-wage pass-through and minimum wage effects. Relative to the efficient economy, welfare losses from monopsony are 3.4 and 2.4 percent for managers and production workers, respectively. Monopsony is stronger over managers because they sort into larger firms, view firms' non-wage attributes as less substitutable, and are less likely to be bound by the minimum wage. Through production complementarities, managers' monopsony alone explains one-fifth of the overall earnings losses from monopsony for production workers.