Monopsony and Outside Options
86 Pages Posted: 15 Jun 2020
Date Written: May 12, 2020
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: Suggested Citation