Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?

Abstract

We analyze the effect of local-level labor market concentration on wages. Using plant-level U.S. Census data during 1978–2016, we find that: (1) local-level employer concentration exhibits substantial cross-sectional variation; (2) consistent with labor market monopsony power, there is a negative relation between local-level employer concentration and wages that strengthens over time; (3) instrumenting concentration with merger activity shows that increased employer concentration decreases wages; (4) the negative relation between employer concentration and wages increases when unionization rates are low; and (5) the link between productivity growth and wage growth is stronger when labor markets are less concentrated. Our results emphasize the role of local labor market monopsonies in influencing firm wage-setting.