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Monopsonistic Wage-setting and Monetary Policy

Author

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  • Takushi Kurozumi
  • Yu Sugioka
  • Willem Van Zandweghe

Abstract

Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth.

Suggested Citation

  • Takushi Kurozumi & Yu Sugioka & Willem Van Zandweghe, 2025. "Monopsonistic Wage-setting and Monetary Policy," Working Papers 25-24, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:102125
    DOI: 10.26509/frbc-wp-202524
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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