Robinson Meets Roy: Monopsony Power and Comparative Advantage

Abstract:

We provide a number of insights into the nature and consequences of monopsony power through the lens of comparative advantage, where employers' power in wage setting stems from match-specific rents. Chief among them is that employers will apply larger wage markdowns to workers with greater comparative advantage at their firm. This leads to stronger monopsony power over more productive workers, provided the workers' comparative advantage aligns with their absolute advantage. Using Brazilian administrative data, we confirm this prediction: monopsony disproportionately affects high-wage workers within firms and workers at high-paying firms. The model, calibrated to our estimates for Brazil, predicts that minimum wages increase both wages and formal employment for more productive workers while pushing less productive workers out of formal employment.

Baris Kaymak, Federal Reserve Bank of Cleveland