Monopsony and Outside Options

86 Pages Posted: 15 Jun 2020

See all articles by Gregor Schubert

Gregor Schubert

Harvard University, Department of Economics

Anna Stansbury

Harvard University, Department of Economics

Bledi Taska

Burning Glass Technologies

Date Written: May 12, 2020

Abstract

In imperfectly competitive labor markets, the value of workers’ outside option matters for their wage. But which jobs comprise workers’ outside option, and to what extent do they matter? We measure the effect of workers’ outside options on wages in the U.S, splitting outside options into two components: within-occupation options, proxied by employer concentration, and outside-occupation options, identified using new occupational mobility data. Using a new instrument for employer concentration, based on differential local exposure to national firm-level trends, we find that moving from the 75th to the 95th percentile of employer concentration (across workers) reduces wages by 5%. Differential employer concentration can explain 21% of the interquartile wage variation within a given occupation across cities. In addition, we use a shift-share instrument to identify the wage effect of local outside-occupation options: differential availability of outside-occupation options can explain a further 13% of within-occupation wage variation across cities. Moreover, the two interact: the effect of concentration on wages is three times as high for occupations with the lowest outward mobility as for those with the highest. Our results imply that (1) employer concentration matters for wages for a large minority of workers, (2) wages are relatively sensitive to the outside option value of moving to other local jobs, and (3) failure to consider the role of outside-occupation options in the concentration-wage relationship leads to bias and obscures important heterogeneity. Interpreted through the lens of a Nash bargaining model, our results imply that a $1 increase in the value of outside options leads to $0.24-$0.37 higher wages.

Keywords: monopsony, labor markets, concentration, outside options

JEL Classification: E24, J31, J42, J62

Suggested Citation

Schubert, Gregor and Stansbury, Anna and Taska, Bledi, Monopsony and Outside Options (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3599454 or http://dx.doi.org/10.2139/ssrn.3599454

Gregor Schubert

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Anna Stansbury (Contact Author)

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

HOME PAGE: http://scholar.harvard.edu/stansbury

Bledi Taska

Burning Glass Technologies ( email )

One Lewis Wharf
Boston, MA 02110
United States

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