Dynamic Wage Setting: The Role of Monopsony Power and Adjustment Costs

15:40-17:00, Thursday, July 4, 2024

I-206, Boxue Building, DUFE

Dr. Ming Xu is an Assistant Professor at Queen's University in Canada. She earned her Ph.D. in Economics from Minnesota in 2018. Her research interests include Macro and Labor Economics. Specifically she is interested in topics including workers' wage setting, firm dynamics, education, and occupation mobility, and her paper has published in Journal of Labor Economics, and R&R at Journal of Labor Economics and American Economic Journal: Macroeconomics.

What drives wage markdowns and passthrough? We develop a structural model of firm dynamics where firms have heterogeneous production functions, monopsony power in labor markets, and face labor adjustment costs. We estimate the model non-parametrically using Danish administrative data and recover firm-level distributions of labor productivity, TFP, and wage markdowns. Firms pay workers 83% of their marginal product on average. 15% of firms pay above marginal product due to dynamic cost considerations. These firms have negative profits and are more leveraged on average. We show that adjustment costs moderate the effect of monopsony power. Specifically, adjustment costs make most firms hoard workers, pay higher wages relative to the monopsony level, and reduce wage volatility. Heterogeneity in wage markdowns and wage sensitivity to firm shocks is driven primarily by adjustment costs rather than monopsony power. Large firms face larger marginal adjustment costs, as do low productivity and highly leveraged firms.

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(QR code is valid until July 8, 2024)