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Labor Market Power and Development

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Abstract

Imperfect competition in labor markets can lead to efficiency losses and lower aggregate output. In this paper, we study whether differences in competitiveness of labor markets can help explain differences in GDP per capita across countries. We structurally estimate a model of oligopsony with free entry for countries at different stages of development and show that the labor supply elasticity, which determines the extent of firms’ labor market power, is increasing with GDP per capita. Wage mark-downs range from 55 percent among low-income countries to around 23 percent among the richest. Output per capita in poorer countries would increase by up to 69 percent if their labor markets were as competitive as in countries at the top of the development ladder.

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  • Tristany Armangué-Jubert & Nezih Guner & Alessandro Ruggieri, 2023. "Labor Market Power and Development," Working Papers wp2023_2306, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2023_2306
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    Keywords

    Labor market power; oligopsony; development; inequality.;
    All these keywords.

    JEL classification:

    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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