IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/25660.html
   My bibliography  Save this paper

Exploitation of Labor? Classical Monopsony Power and Labor's Share

Author

Listed:
  • Wyatt J. Brooks
  • Joseph P. Kaboski
  • Yao Amber Li
  • Wei Qian

Abstract

How important is the exercise of classical monopsony power against labor for the level of wages and labor's share? We examine this in the context of China and India – two large, rapidly-growing developing economies. Using theory, we develop a novel screen to quantify how wages are affected by market power exerted in labor markets, either by a single firm or a group of cooperating firms. The theory guides the measurement of labor “markdowns”, i.e., the gap between wage and the value of the marginal product of labor, and the screen examines how they comove with local labor market share and the share of cooperating firms. Applying this test, we find that markdowns substantially lower the labor share: by up to 10 percentage points in China and 15 percentage points in India. This impact has fallen over time in both countries as firm concentration in these labor markets has decreased.

Suggested Citation

  • Wyatt J. Brooks & Joseph P. Kaboski & Yao Amber Li & Wei Qian, 2019. "Exploitation of Labor? Classical Monopsony Power and Labor's Share," NBER Working Papers 25660, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25660
    Note: DEV EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w25660.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 13-70.
    2. Oleg Itskhoki & Benjamin Moll, 2019. "Optimal Development Policies With Financial Frictions," Econometrica, Econometric Society, vol. 87(1), pages 139-173, January.
    3. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-2471, October.
    4. Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2016. "Prices, Markups, and Trade Reform," Econometrica, Econometric Society, vol. 84, pages 445-510, March.
    5. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2015. "Competition, Markups, and the Gains from International Trade," American Economic Review, American Economic Association, vol. 105(10), pages 3183-3221, October.
    6. Michael R. Ransom & Val E. Lambson, 2011. "Monopsony, Mobility, and Sex Differences in Pay: Missouri School Teachers," American Economic Review, American Economic Association, vol. 101(3), pages 454-459, May.
    7. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 61-103.
    8. Jose Asturias & Manuel García-Santana & Roberto Ramos, 2019. "Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India," Journal of the European Economic Association, European Economic Association, vol. 17(6), pages 1881-1940.
    9. David Berger & Kyle Herkenhoff & Simon Mongey, 2018. "Labor Market Power," 2018 Meeting Papers 170, Society for Economic Dynamics.
    10. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    11. Kaivan Munshi & Mark Rosenzweig, 2016. "Networks and Misallocation: Insurance, Migration, and the Rural-Urban Wage Gap," American Economic Review, American Economic Association, vol. 106(1), pages 46-98, January.
    12. Ransom, Michael R, 1993. "Seniority and Monopsony in the Academic Labor Market," American Economic Review, American Economic Association, vol. 83(1), pages 221-233, March.
    13. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    14. Amil Petrin & Jagadeesh Sivadasan, 2013. "Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 286-301, March.
    15. Orley C. Ashenfelter & Henry Farber & Michael R Ransom, 2010. "Labor Market Monopsony," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 203-210, April.
    16. Malthus, Thomas Robert, 1798. "An Essay on the Principle of Population," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number malthus1798.
    17. Braverman, Avishay & Stiglitz, Joseph E., 1986. "Landlords, tenants and technological innovations," Journal of Development Economics, Elsevier, vol. 23(2), pages 313-332, October.
    18. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
    19. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
    20. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
    21. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 561-644.
    22. repec:oup:qjecon:v:129:y:2013:i:1:p:61-103 is not listed on IDEAS
    23. Ulrich Doraszelski & Jordi Jaumandreu, 2013. "R&D and Productivity: Estimating Endogenous Productivity," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1338-1383.
    24. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    25. Hall, Robert E., 1987. "Productivity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 421-444, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sabien Dobbelaere & Boris Hirsch & Steffen Müller & Georg Neuschaeffer, 2020. "Organised Labour, Labour Market Imperfections, and Employer Wage Premia," CESifo Working Paper Series 8739, CESifo.
    2. Ziesemer, Thomas, 2021. "Labour-augmenting technical change data for alternative elasticities of substitution, growth, slowdown, and distribution dynamics," MERIT Working Papers 2021-003, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. David Berger & Kyle Herkenhoff & Simon Mongey, 2018. "Labor Market Power," 2018 Meeting Papers 170, Society for Economic Dynamics.
    4. Mertens, Matthias, 2020. "Labour market power and between-firm wage (in)equality," IWH-CompNet Discussion Papers 1/2020, Halle Institute for Economic Research (IWH).
    5. Filip Abraham & Yannick Bormans, 2020. "The Impact of Superstar Firms on the Labor Share: Evidence from Belgium," De Economist, Springer, vol. 168(3), pages 369-402, September.
    6. Ariell Reshef & Gianluca Santoni, 2019. "Are Your Labor Shares Set in Beijing? The View through the Lens of Global Value Chains," Working Papers 2019-16, CEPII research center.
    7. Mertens, Matthias, 2020. "Labour market power and between-firm wage (in)equality," IWH Discussion Papers 13/2020, Halle Institute for Economic Research (IWH).
    8. Quint Wiersma, 2019. "The impact of WTO accession on Chinese firms' product and labor market power," Tinbergen Institute Discussion Papers 19-037/V, Tinbergen Institute.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hsu, Wen-Tai & Lu, Yi & Wu, Guiying Laura, 2020. "Competition, markups, and gains from trade: A quantitative analysis of China between 1995 and 2004," Journal of International Economics, Elsevier, vol. 122(C).
    2. Simone Lenzu & Francesco Manaresi, 2019. "Sources and implications of resource misallocation: new evidence from firm-level marginal products and user costs," Questioni di Economia e Finanza (Occasional Papers) 485, Bank of Italy, Economic Research and International Relations Area.
    3. Zhang, Hongsong, 2019. "Non-neutral technology, firm heterogeneity, and labor demand," Journal of Development Economics, Elsevier, vol. 140(C), pages 145-168.
    4. Dario Tortarolo & Roman D. Zarate, 2020. "Imperfect competition in product and labour markets. A quantitative analysis," Discussion Papers 2020-05, Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP).
    5. Dobbelaere, Sabien & Kiyota, Kozo & Mairesse, Jacques, 2015. "Product and labor market imperfections and scale economies: Micro-evidence on France, Japan and the Netherlands," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 290-322.
    6. Daniel Berkowitz, 2018. "Market Distortions and Labor Share Distributions: Evidence from Chinese Manufacturing Firms," Working Paper 6466, Department of Economics, University of Pittsburgh.
    7. Lu, Yi & Sugita, Yoichi & Zhu, Lianming, 2019. "Wage and Markdowns and FDI Liberalization," Discussion paper series HIAS-E-83, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    8. Doraszelski, Ulrich & Jaumandreu, Jordi, 2019. "Using Cost Minimization to Estimate Markups," CEPR Discussion Papers 14114, C.E.P.R. Discussion Papers.
    9. Mertens, Matthias, 2020. "Labor market power and the distorting effects of international trade," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    10. Weinberger, Ariel, 2020. "Markups and misallocation with evidence from exchange rate shocks," Journal of Development Economics, Elsevier, vol. 146(C).
    11. Ayumu Ken Kikkawa & Glenn Magerman & Emmanuel Dhyne, 2019. "Imperfect competition in firm-to-firm trade," Working Paper Research 363, National Bank of Belgium.
    12. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 105-163.
    13. Dai, Xiaoyong & Cheng, Liwei, 2016. "Market distortions and aggregate productivity: Evidence from Chinese energy enterprises," Energy Policy, Elsevier, vol. 95(C), pages 304-313.
    14. Alan Manning, 2021. "Monopsony in Labor Markets: A Review," ILR Review, Cornell University, ILR School, vol. 74(1), pages 3-26, January.
    15. Fan, Haichao & Gao, Xiang & Li, Yao Amber & Luong, Tuan Anh, 2018. "Trade liberalization and markups: Micro evidence from China," Journal of Comparative Economics, Elsevier, vol. 46(1), pages 103-130.
    16. Xunyong Xiang & Feixiang Chen & Chun†Yu Ho & Wen Yue, 2017. "Heterogeneous effects of trade liberalisation on firm†level markups: Evidence from China," The World Economy, Wiley Blackwell, vol. 40(8), pages 1667-1686, August.
    17. Yongzheng Liu & Jie Mao, 2019. "How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 261-291, August.
    18. Mertens, Matthias, 2019. "Micro-mechanisms behind declining labour shares: Market power, production processes, and global competition," IWH-CompNet Discussion Papers 3/2019, Halle Institute for Economic Research (IWH).
    19. Daniel Berkowitz, 2016. "Capital-Labor Substitution, Institutions and Labor Shares," Working Paper 5981, Department of Economics, University of Pittsburgh.
    20. Bournakis, Ioannis & Papanastassiou, Marina & Papaioannou, Sotiris, 2020. "Multinationals and Domestic TFP: Market Shares, Agglomerations Gains and Foreign Ownership," MPRA Paper 106626, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:25660. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.