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

Abstract

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Monopsonistic competition, trade, and the profit share*

“…Monopsony power has major consequences, for instance, on wage dispersion and income inequality (Manning, 2003(Manning, , 2011(Manning, , 2021Lentz and Mortensen, 2010;Card et al, 2018). The study of monopsony has continued in recent years in the industrial organization literature (Azar et al, 2017(Azar et al, , 2019Berger et al, 2019;Brooks et al, 2021). This literature has shown large levels of concentration in labor markets (Azar et al, 2017), and pervasive market power of employers who lower wages relative to the marginal product of labor (Brooks et al, 2021).…”

“…The study of monopsony has continued in recent years in the industrial organization literature (Azar et al, 2017(Azar et al, , 2019Berger et al, 2019;Brooks et al, 2021). This literature has shown large levels of concentration in labor markets (Azar et al, 2017), and pervasive market power of employers who lower wages relative to the marginal product of labor (Brooks et al, 2021). In particular, the estimates of the average marginal product of labor are 17-53 percent higher than the average wage (Azar et al, 2019;Hershbein et al, 2020).…”

“…However, models of oligopsony and oligopoly are less tractable than models with atomistic firms. Furthermore, some of these models feature Cournot competition and all firms pay the same price for the input considered (Morlacco, 2017;Macedoni and Tyazhelnikov, 2018;Brooks et al, 2021), which is at odds with the evidence of firm heterogeneity in wages and input prices. 7 A second approach, featured by Egger et al (2019) and Jha and Rodriguez-Lopez (2021), considers the more tractable monopsonistic competition, whereby wages of the monopsonistic factor vary across firms.…”

“…The paper is closely related to Brooks et al (2021), who structurally estimate a large negative effect of monopsony power on wages in China and India. The authors' key channel is at the firm level: larger market share in the labor market is associated with a larger monopsony power, and the market share, in turn, depends on the labor market concentration.…”

The Impact of WTO Accession on Chinese Firms’ Product and Labor Market Power

“…4 Brooks et al (2019) show evidence of the importance of firms' wage-setting power in explaining a falling labor share in China over the period 1999-2017. Berger et al (2019 document substantial welfare losses from firms' labor market (monopsony) power using US Census micro data.…”