If You Don’t Like Your Job, Can You Always Quit? Pervasive Monopsony Power and Freedom in the Labor Market

Abstract

One common metric of monopsony power is the quit elasticity, measuring how much more likely a worker is to quit a job in response to a wage change. Experimental and quasi-experimental variation in wages across workers within a given job results in quit elasticities in the 2-3 range, implying that a 10% reduction in wages increases the probability of quitting by 20-30%. In a model with monopsonistic employers, a quit elasticity of 2-3 also implies that workers are paid about 80-85% of the value they produce. These results indicate that employer power is pervasive. We present observational evidence that historically disadvantaged groups have systematically lower quit elasticities, indicating they face even greater employer power. Because monopsony power comes from an inability of workers to voluntarily switch jobs, the quit rate and especially the quit elasticity can be a useful metric for judging the health of the labor market. Pervasive employer power alters the analysis of labor market policy in a number of important ways.

Keywords: monopsony power, quit elasticity, wages, job ladder, domination, historically disadvantaged groups, labor market indicators