Firm Market Power and the Earnings Distribution

Abstract

Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the dynamic model proposed by Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the US. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm's labor supply elasticity and the earnings of its workers. I also contrast the semi-structural method with the more traditional use of concentration ratios to measure a firm's labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counter-factual earnings distribution which allows the effects of firm market power to vary across the earnings distribution. I estimate the average firm's labor supply elasticity to be 1.08, however my findings suggest there to be significant variability in the distribution of firm market power across US firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm's labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with wage gains of between 5 and 18 percent. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm's market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in firms' labor supply elasticities reduces the variance of the earnings distribution by 9 percent.