Monopsony Power and Firm Organization

Abstract

Labor market competition drastically differs for production workers and managers. For instance, in Portugal, there are half as many firms competing for managers as for production workers in the typical local labor market. Using administrative data from Portugal together with a general equilibrium model of oligopsony that incorporates minimum wages and management delegation, we show that monopsony power by firms leads to a welfare loss of 5.7% for production workers and 23.1% for managers relative to an efficient economy. Production workers bear smaller losses because they often work in markets with more competitor firms, view firms as closer substitutes, and are more affected by the minimum wage. The weak monopsony power of low-wage firms over production workers implies that raising the statutory minimum wage reduces overall welfare and affects managers through worker reallocation and delegation adjustments. Moving from the benchmark to an occupation-based minimum wage that optimally addresses monopsony power increases welfare by about 0.2% for both occupations.