Imperfect Competition, Compensating Differentials and Rent Sharing in the U.S. Labor Market

Abstract

We quantify the importance of imperfect competition in the U.S. labor market by estimating
the size of rents earned by American firms and workers from ongoing employment
relationships. To this end, we construct a matched employer-employee panel data set by
combining the universe of U.S. business and worker tax records for the period 2001-2015.
Using this panel data, we identify and estimate an equilibrium model of the labor market
with two-sided heterogeneity where workers view firms as imperfect substitutes because of
heterogeneous preferences over non-wage job characteristics. The model allows us to draw
inference about imperfect competition, compensating differentials and rent sharing. We
also use the model to quantify the relevance of non-wage job characteristics and imperfect
competition for inequality and tax policy, to assess the economic determinants of worker
sorting, and to offer a unifying explanation of key empirical features of the U.S. labor
market.

Keywords: Compensating differentials, firm effects, inequality, imperfect competition, monopsony, rent sharing, wage setting, worker sorting