Estimating Labor Market Power

37 Pages Posted: 30 Sep 2019

See all articles by José Azar

José Azar

University of Navarra, IESE Business School; CEPR

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Ioana Elena Marinescu

University of Pennsylvania - School of Social Policy & Practice; National Bureau of Economic Research (NBER)

Date Written: September 18, 2019

Abstract

How much power do employers have to suppress wages below marginal productivity? It depends on the firm-level labor supply elasticity. Leveraging data on job applications from the large job board CareerBuilder.com, we estimate the wage impact on workers' choice among differentiated jobs in the largest occupations. We use a nested logit model of worker's utility for applying to jobs with varying wages and characteristics, including distance from the potential worker's home. We account for the endogeneity of wages by using several different instrumental variable strategies. We find that failing to instrument results in implausibly low elasticities, whereas plausible instruments result in more elastic estimates. Still, the implied market-level labor supply elasticity is about 0.6, while the firm-level labor supply elasticity is about 5.8. This implies that workers produce about 17% more than their wage level, consistent with employers having significant market power even for the largest occupational labor markets.

Keywords: labor supply, monopsony, nested logit

JEL Classification: J22, J31, J42, L13

Suggested Citation

Azar, José and Berry, Steven T. and Marinescu, Ioana Elena, Estimating Labor Market Power (September 18, 2019). Available at SSRN: https://ssrn.com/abstract=3456277 or http://dx.doi.org/10.2139/ssrn.3456277

José Azar

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

CEPR ( email )

London
United Kingdom

HOME PAGE: http://https://sites.google.com/site/joseazar/

Steven T. Berry

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8264
United States
203-432-3556 (Phone)
203-432-6323 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Ioana Elena Marinescu (Contact Author)

University of Pennsylvania - School of Social Policy & Practice ( email )

3701 Locust Walk
Philadelphia, PA 19104-6214
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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