Monopsony Power and the Transmission of Monetary Policy

This paper studies how labor market power affects the transmission of monetary policy. Using administrative U.S. Census data, we show that firms with high monopsony power—defined as those accounting for over 10 percent of the local wage bill—respond less to monetary policy in terms of their wage bill and employment. We then develop a New Keynesian model with heterogeneous firms and oligopsonistic competition to interpret these findings. Wage stickiness combined with firms’ labor market power is key to generating the heterogeneous responses that we document. Our model highlights two channels through which oligopsony shapes the aggregate effects of monetary policy: partial passthrough and misallocation. Calibrated to U.S. labor markets, the model implies that the decline in labor market power since the 1980s has increased the output response to monetary policy by about 10 percent and accounts for about 15 percent of the estimated flattening of the Phillips curve.