Labor Market Power: From Micro Evidence to Macro Consequences

The traditional theoretical and empirical “micro approach” to studying labor market power (or monopsony) requires that firms are small and atomistic. This is at odds with the reality of labor markets in which monopsony potentially matters most. Empirically, many markets are concentrated and characterized by large, dominant employers. The actions of large employers in an occupation or industry affect local and national wages, employment and output. Employers that understand their largeness may then act strategically when hiring and setting wages, generating misallocation and harming workers. This paper advocates for a “macro approach”: (1) directly model equilibrium behavior of large employers, (2) combine macro data and empirical estimates of employers’ responses to policy changes—obtained using the “micro approach”—to estimate the model, (3) use the model to compute the aggregate costs of monopsony, and optimal policies. This approach provides new perspectives on minimum wage and antitrust policy.