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Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

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  • Arindrajit Dube
  • Alan Manning
  • Suresh Naidu

Abstract

We show that administrative hourly wage data exhibits considerable bunching at round numbers that cannot be explained by rounding of survey respondents. We consider two explanations—worker left-digit bias and employer optimization frictions. We experimentally rule out left-bunching by randomizing wages for an identical task on Amazon Mechanical Turk, and fail to find evidence of any discontinuity in the labor supply function as predicted by workers’ left-digit bias despite a considerable degree of monopsony. We replicate the absence of round number discontinuities in firm labor supply in matched worker-firm hourly wage data from Oregon as well as in an online stated preference experiment conducted with Wal-Mart workers. Further, the shape of the missing mass that accounts for the bunching at a round number exhibits none of the asymmetry predicted by worker left-digit bias. Symmetry of the missing mass distribution around the round number suggests that employer optimization frictions are more important. We show that a more monopsonistic market requires less employer mis-optimization to rationalize the bunching in the data. The extent of monopsony power implied by our estimated labor supply elasticities, which are in line with other recent studies, are consistent with a sizable amount of non-optimal bunching, with only modest losses in profits. Overall, the extent and form of round-number bunching suggests that “behavioral firms” can systematically misprice labor without being driven out of the market in the presence of monopsony power.

Suggested Citation

  • Arindrajit Dube & Alan Manning & Suresh Naidu, 2018. "Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers," NBER Working Papers 24991, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24991
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    Cited by:

    1. Bas Scheer & Wiljan van den Berge & Maarten Goos & Alan Manning & Anna Salomons, 2022. "Alternative Work Arrangements and Worker Outcomes: Evidence from Payrolling," CPB Discussion Paper 435, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Cross, Jeffrey & Zhang, Guangli, 2024. "Focal points for giving," Journal of Economic Psychology, Elsevier, vol. 102(C).
    3. Francesco Amodio & NicolÔøΩs de Roux, 2021. "Labor Market Power in Developing Countries: Evidence from Colombian Plants," Documentos CEDE 19267, Universidad de los Andes, Facultad de Economía, CEDE.
    4. Anna Sokolova & Todd Sorensen, 2021. "Monopsony in Labor Markets: A Meta-Analysis," ILR Review, Cornell University, ILR School, vol. 74(1), pages 27-55, January.
    5. Matthew S. Johnson & Daniel Schwab & Patrick Koval, 2022. "Legal Protection Against Retaliatory Firing Improves Workplace Safety," Working Papers 2203, College of the Holy Cross, Department of Economics.
    6. Lehner, Lukas & Parolin, Zachary & Pignatti, Clemente & Pintro Schmitt, Rafael, 2024. "Monopsony Power and Poverty: The Consequences of Walmart Supercenter Openings," INET Oxford Working Papers 2024-07, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    7. Clémence Berson & Raphaël Lardeux & Claire Lelarge, 2021. "The Cognitive Load of Financing Constraints: Evidence from Large-Scale Wage Surveys," Working papers 836, Banque de France.
    8. Patrick Kline, 2025. "Labor Market Monopsony: Fundamentals and Frontiers," RFBerlin Discussion Paper Series 2536, Rockwool Foundation Berlin (RF Berlin).
    9. Erich Battistin & Agar Brugiavini & Enrico Rettore & Guglielmo Weber, 2009. "The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach," American Economic Review, American Economic Association, vol. 99(5), pages 2209-2226, December.
    10. David Autor & Arindrajit Dube & Annie McGrew, 2023. "The Unexpected Compression: Competition at Work in the Low Wage Labor Market," NBER Working Papers 31010, National Bureau of Economic Research, Inc.
    11. Ellora Derenoncourt & David Weil, 2024. "Voluntary Minimum Wages," Working Papers 333, Princeton University, Department of Economics, Center for Economic Policy Studies..
    12. Douglas A. Webber, 2018. "Employment Adjustment Over the Business Cycle: The Impact of Competition in the Labor Market," DETU Working Papers 1806, Department of Economics, Temple University.
    13. Andrew Weaver, 2022. "Who Has Trouble Hiring? Evidence from a National IT Survey," ILR Review, Cornell University, ILR School, vol. 75(3), pages 608-637, May.
    14. Duch-Brown, Néstor & Gomez-Herrera, Estrella & Mueller-Langer, Frank & Tolan, Songül, 2022. "Market power and artificial intelligence work on online labour markets," Research Policy, Elsevier, vol. 51(3).
    15. Breunig, Robert & Deutscher, Nathan & Hamilton, Steven, 2024. "Rounded Up: Using round numbers to identify tax evasion," Journal of Public Economics, Elsevier, vol. 238(C).

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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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