Welfare implications of labor market power: Declining labor market concentration increase labor's share of income by 2.89 pct points 1976-2014, suggesting that labor market concentration is not the reason for a declining labor share

Labor Market Power. David W. Berger, Kyle F. Herkenhoff, Simon Mongey. NBER Working Paper No. 25719. March 2019. https://www.nber.org/papers/w25719

Abstract: What are the welfare implications of labor market power? We provide an answer to this question in two steps: (1) we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market, (2) we estimate key parameters using within-firm-state, across-market differences in wage and employment responses to state corporate tax changes in U.S. Census data. We validate the model against recent evidence on productivity-wage pass-through, and new measurements of the distribution of local market concentration. The model implies welfare losses from labor market power that range from 2.9 to 8.0 percent of lifetime consumption. However, despite large contemporaneous losses, labor market power has not contributed to the declining labor share. Finally, we show that minimum wages can deliver moderate, and limited, welfare gains by reallocating workers from smaller to larger, more productive firms.


Tyler Cowen summarizing (Some implications of monopsony models, Mar 01 2019, https://marginalrevolution.com/marginalrevolution/2019/04/some-implications-of-monopsony-models.html):

More workers ought to be in larger firms, as those firms are afraid to hire more, knowing that bids up wages for everyone. Therefore (ceteris paribus) the large firms in the economy ought to be larger.

Raising the legal minimum wage also reallocates workers into larger firms, and again makes them larger.

Tough stuff if you worry a lot about both monopoly and monopsony at the same time -- choose your poison!

I have adapted those points from a recent paper by David Berger, Kyle Herkenhoff, and Simon Mongey, "Labor Market Power."  On the empirics, they conclude: "Our theory implies that this declining labor market concentration increase labor's share of income by 2.89 percentage points between 1976 and 2014, suggesting that labor market concentration is not the reason for a declining labor share."  So the paper makes no one happy (good!): monopsony is significant, but has been declining in import.