Firm market power and the earnings distribution

• Use linked employer–employee data to estimate dynamic labor supply model
• First to estimate firm-level labor supply elasticities
• Average firm is fairly monopsonistic, but there is a wide distribution.
• First to demonstrate link between firm labor supply elasticity and worker earnings

Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the empirical strategy of Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the U.S. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm's labor supply elasticity and the earnings of its workers. I also contrast the dynamic model strategy with the more traditional use of concentration ratios to measure a firm's labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counterfactual earnings distribution which allows the effects of firm market power to vary across the earnings distribution.I estimate the average labor supply elasticity to the firm to be 1.08, however my findings suggest that there is significant variability in the distribution of firm market power across U.S. firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm's labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with earnings gains of between 5 and 16%. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm's market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in the labor supply elasticity to the firm reduces the variance of the earnings distribution by 9%.