Monopsony in Labor Markets: A Meta-Analysis

Abstract

When jobs offered by different employers are not perfect substitutes, employers gain wage-setting power; the extent of this power can be captured by the elasticity of labor supply to the firm. The authors collect 1,320 estimates of this parameter from 53 studies. Findings show a prominent discrepancy between estimates of direct elasticity of labor supply to changes in wage (smaller) and the estimates converted from inverse elasticities (larger), suggesting that labor market institutions may reign in a substantial amount of firm wage-setting power. This gap remains after they control for 22 additional variables and use Bayesian Model Averaging and LASSO to address model uncertainty; however, it is less pronounced for studies employing an identification strategy. Furthermore, the authors find strong evidence that implies the literature on direct estimates is prone to selective reporting: Negative estimates of the elasticity of labor supply to the firm tend to be discarded, leading to upward bias in the mean reported estimate. Additionally, they point out several socioeconomic factors that seem to affect the degree of monopsony power.

Monopsony in Labor Markets: A Review

“…Since then Webber (2016) reported a similar finding for US data but also found that this is primarily because women are more likely to work in firms with lower labor supply elasticities. The meta-study of Sokolova and Sorensen (2020) found that the average estimated separations elasticity is lower for women than for men, although the magnitude of the difference could explain only part of the observed gender wage gap. Card et al (2016) found the pass-through effect to be smaller for women than for men in Portugal.…”

“…The relationship between quit rates and wages has been studied for a long time (see, for example, Pencavel 1972), and it is a common finding that there is a negative effect of wages on quits. The estimates obtained are usefully surveyed in Sokolova and Sorensen (2020) who reported a separations elasticity of approximately 3 for those studies judged to be following ''best practice,'' although 5 for those with an identification strategy. These estimates imply considerable monopsony power.…”

Uncertainty and the marginal revenue product–wage gap

“…Consequently, our analysis provides a further explanation for the emergence of the MRP L –wage gap. Sokolova and Sorensen (2018) suggest that the evidence for monopsonistic labor markets is quite strong conditional on the existing empirical literature on labor supply elasticity, which yields to MRP L –wage gap. In this paper, we show that inferring the MRP L –wage gap from the estimates of labor supply elasticities underestimates the actual MRP L –wage gap in the presence of uncertainty and risk aversion.…”

“…More recently, renewed interest in empirical studies on monopsony provided further evidence for finite labor supply elasticity using various data sets and methodologies (Depew & Sorensen, 2013; Depew, Norlander, & Sorensen, 2017; Dube, Jacobs, Naidu, & Suri, 2018; Falch, 2017; Hirsch, Jahn, Manning, & Oberfichtner, 2018a; Hirsch & Jahn, 2015; Hirsch, Jahn, & Schnabel, 2018b; Ransom, 2018; Webber, 2015). Sokolova and Sorensen (2018) provide a meta‐analysis from 801 estimates of the elasticity of labor supply to the firm reported in 38 published studies. The mean estimate reported in the literature is 3.75, implying that the last worker hired is paid about 79% of his or her worth, whereas the median is much lower—only 1.27.…”

Firm Size and Employment during the Pandemic

“…Overall, this study indicates that firm size is positively associated not only with higher wages, as shown in prior studies, but also with greater employment security. The uneven impacts of the pandemic are likely to accelerate the market concentration in the United States ( Autor et al 2020 ; Philippon 2019 ; Sokolova and Sorensen 2021 ) and slow down the job recovery, particularly in industries with high remotability. It also shows that the initial policies developed to maintain the payroll of small businesses were insufficient in closing the employment gap between small and large enterprises.…”