Exploitation of Labor? Classical Monopsony Power and Labor's Share
How important is the exercise of classical monopsony power against labor for the level of wages and labor's share? We examine this in the context of China and India – two large, rapidly-growing developing economies. Using theory, we develop a novel screen to quantify how wages are affected by market power exerted in labor markets, either by a single firm or a group of cooperating firms. The theory guides the measurement of labor “markdowns”, i.e., the gap between wage and the value of the marginal product of labor, and the screen examines how they comove with local labor market share and the share of cooperating firms. Applying this test, we find that markdowns substantially lower the labor share: by up to 10 percentage points in China and 15 percentage points in India. This impact has fallen over time in both countries as firm concentration in these labor markets has decreased.
We have benefitted from comments received at seminars at the Federal Reserve Board of Governors and the University of Rochester. We are thankful to Jack Bao for providing excellent research assistance and to the International Growth Centre (Grant No. 89318) and the HKUST IEMS (Grant No. IEMS16BM02) for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.