Labor Market Power

David W. Berger, Kyle F. Herkenhoff, Simon Mongey

NBER Working Paper No. 25719
Issued in March 2019, Revised in October 2019
NBER Program(s):Economic Fluctuations and Growth Program, Labor Studies Program

We develop a tractable quantitative, general equilibrium, oligopsony model of the labor market that we use to measure the macroeconomic implications of labor market power. Strategic interaction complicates inference of parameters that are key to this exercise. To address this challenge, we contribute estimates of market share dependent wage and employment responses to state corporate tax changes in U.S. Census data, which we combine with the structure of the model. We validate against the distribution of local labor market concentration and quasi-experimental evidence on productivity-wage pass-through. Relative to a counterfactual competitive economy, and accounting for transition dynamics, we measure welfare losses from labor market power to be roughly 5 percent of lifetime consumption. Minimum wage and merger experiments caution that concentration and welfare may not negatively comove.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25719