Labor Market Power

81 Pages Posted: 21 May 2019

See all articles by David Berger

David Berger

Northwestern University

Kyle Herkenhoff

University of Minnesota - Minneapolis

Simon Mongey

University of Chicago

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What are the welfare implications of labor market power? We provide an answer to this question in two steps: (1) we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market, (2) we estimate key parameters using within-firm-state, across-market differences in wage and employment responses to state corporate tax changes in U.S. Census data. We validate the model against recent evidence on productivity-wage pass-through, and new measurements of the distribution of local market concentration. The model implies welfare losses from labor market power that range from 2.9 to 8.0 percent of lifetime consumption. However, despite large contemporaneous losses, labor market power has not contributed to the declining labor share. Finally, we show that minimum wages can deliver moderate, and limited, welfare gains by reallocating workers from smaller to larger, more productive firms.

Keywords: wage setting, market structure, labor markets

JEL Classification: E2, J2, J42

Suggested Citation

Berger, David and Herkenhoff, Kyle and Mongey, Simon, Labor Market Power. IZA Discussion Paper No. 12276, Available at SSRN:

David Berger (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Kyle Herkenhoff

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

Simon Mongey

University of Chicago ( email )

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