Labor Market Power

100 Pages Posted: 13 May 2021

See all articles by David W. Berger

David W. Berger

Duke University, Fuqua School of Business-Economics Group

Kyle Herkenhoff

University of Minnesota - Minneapolis

Simon Mongey

University of Chicago

Date Written: May 11, 2021

Abstract

To measure labor market power in the US economy, we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market. We estimate key model parameters by matching the firm-level relationship between labor market share and employment size and wage responses to state corporate tax changes. The model quantitatively replicates quasi-experimental evidence on (i) imperfect productivity-wage pass-through, (ii) strategic behavior of dominant employers, and (iii) the local labor market impact of mergers. We then measure welfare losses relative to the efficient allocation. Accounting for transition dynamics, we quantify welfare losses from labor market power relative to the efficient allocation as roughly 6 percent of lifetime consumption. An analytical decomposition attributes equal parts to dead-weight losses and misallocation. Lastly, we find that declining local concentration added 4 ppt to labor’s share of income between 1977 and 2013.

Keywords: Labor markets, Market structure, Oligopsony, Strategic interaction

JEL Classification: E2, J2, J42

Suggested Citation

Berger, David W. and Herkenhoff, Kyle and Mongey, Simon, Labor Market Power (May 11, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-58, Available at SSRN: https://ssrn.com/abstract=3844532 or http://dx.doi.org/10.2139/ssrn.3844532

David W. Berger

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
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 (Contact Author)

University of Chicago ( email )

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