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Employer Power: Consequences for Wages, Inequality and Spillovers

In several countries, wages have stagnated and union membership declined, even as productivity has increased. The established view of employers helpless to the labor market's invisible hand has increasingly come under question. Attention has turned towards the power of employers to set wages; yet only recently have the data required to investigate this – observing workers at their employers – become available, and then mostly in richer countries. My first chapter, “Monopsony in Movers” (co-authored with Arindrajit Dube and Suresh Naidu), proposes a new credible estimation strategy to measure employer monopsony power. We build on the idea that employers with more power can pay lower wages without workers quitting. Using administrative data from Oregon, USA, we compare the quit rates of similar workers who leave the same firm at the same time but land at differently paying new firms. We find that monopsonistic competition is pervasive, even in low-wage, high-turnover sectors. My second chapter, “Firms and Inequality When Unemployment is High”, investigates employer power using tax data from South Africa. Previously, developing countries received marginal attention in this literature. I find that firm wage policies explain a larger share of wage inequality in South Africa than in richer countries. I estimate that this is driven by higher productivity dispersion, and employer monopsony power, which is in turn linked to higher unemployment. These firm-level dynamics may exacerbate inequality in developing countries more generally, which share similar characteristics. My third and main chapter, “Collective Bargaining and Spillovers in Local Labor Markets”, considers wage-setting institutions under monopsonistic competition. My model predicts that non-covered firms “close” to collective bargaining firms will increase their wages in tandem with wage agreements. I propose a model-consistent and empirically rich measure of “close” firms, the flow of workers between them, which captures firm strategic interaction. I test my hypotheses across a decade of wage agreements. Observed wages in collective bargaining firms follow sharp increases in prescribed wages, and indeed firms “closer” to bargaining councils increase wages more than firms further away. A microdata simulation suggests that spillovers double the intensive and extensive margin effects of collective bargaining agreements on the full wage distribution.