Anna Stansbury - "Monopsony and Outside Options"
Keywords: labor markets, monopsony, employer concentration, wage bargaining
In imperfectly competitive labor markets, the value of workers’ outside option matters for their wage. But which jobs comprise workers’ outside option, and to what extent do they matter? We measure the effect of outside options on wages in the U.S, in two components: within-occupation options, proxied by employer concentration, and outside-occupation options, identified using new occupational mobility data. Using a new instrument for employer concentration, based on differential local exposure to national firmlevel trends, we find that moving from the 25th to the 75th percentile of employer concentration reduces wages by 5%, and can explain 21% of the interquartile wage variation within a given occupation across cities. In addition, we use a shift-share instrument to identify the wage effect of local outside-occupation options: differential availability of outside-occupation options can explain a further 13% of within-occupation wage variation across cities. Moreover, the two interact: the effect of concentration on wages is three times as high for occupations with the lowest outward mobility as for those with the highest. Our results imply that (1) employer concentration matters for wages for a large minority of workers, (2) wages are relatively sensitive to the outside option value of moving to other local jobs, and (3) failure to consider the role of outside-occupation options in the concentration-wage relationship leads to bias and obscures important heterogeneity. Interpreted through the lens of a Nash bargaining model, our results imply that a USD1 increase in the value of outside options leads to USD 0.24 - USD 0.37 higher wages.