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A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist

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  • Matthew E. Kahn
  • Joseph Tracy

Abstract

Over the last thirty years, there has been a rise in several empirical measures of local labor market monopsony power. The monopsonist has a profit incentive to offer lower wages to local workers. Mobile high skill workers can avoid the lower monopsony wages by moving to other more competitive local labor markets featuring a higher skill price vector. We present a Roy Model of heterogeneous worker sorting across local labor markets that has several empirical implications. Monopsony markets are predicted to experience a “brain drain” over time. Using data over four decades we document this deskilling associated with local monopsony power. This means that observed cross-sectional wage gaps in monopsony markets partially reflect sorting on worker ability. Going forward the rise of work from home may act as a substitute for high-skill worker migration from monopsony markets.

Suggested Citation

  • Matthew E. Kahn & Joseph Tracy, 2023. "A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist," NBER Working Papers 31014, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31014
    Note: LS
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    JEL classification:

    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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