Monopsony Power and Inequality

Introduction

What is the role played by monopsony (monopoly power in the demand for labor) in widening earning inequalities? Recent studies documented the pervasiveness of monopsony power in modern labor markets. Monopsonistic employers can cut wages without losing workers to competitors, pay labor below its productivity, and hire fewer workers than in a competitive labor market.

Inefficiency of Monopsony

The equilibrium is inefficient as the surplus given by market power is lower than the surplus extracted from workers who are also exposed to excessive work injury risk. Monopsony contributes to explain:

1. Declining labor shares of income
2. Persistently high levels of workplace accidents
3. Limited disemployment effects of minimum wages

Much less is known about the role of monopsony in increasing earning inequality. This project aims at filling this gap by:

i) Contributing to a better understanding of the sources of monopsony power
ii) Assessing their relevance across different socio-economic groups

Sources of Monopsony Power

Monopsony power can be due to anticompetitive arrangements introduced often in a non-transparent way in labor contracts. Another source of monopsony power is the lack of information on alternative job opportunities.

Frictions in the matching of workers and vacancies may discourage risk-averse workers when planning to quit the firm after wage cuts. Spatial mismatch in the allocation of jobs and quitters may increase monopsony power vis-à-vis workers having a stronger distaste for commuting.

Some groups of workers may also have stronger cognitive biases when interpreting available information on outside opportunities.

Project Structure

The three parts of the project will:

i) Assess the incidence of anticompetitive arrangements in Europe
ii) Estimate firm-level labor supply elasticities across different categories of workers
iii) Using survey and experimental methods, evaluate to what extent the heterogeneity among socio-economic groups of willingness to quit a low-paid job is related to lack of information or cognitive biases.