The cyclical behaviour of employers' monopsony power and workers' wages

Abstract

This paper investigates the behaviour of employers' monopsony power and workers' wages over the business cycle. Using German administrative linked employer--employee data for the years 1985--2010 and an estimation framework based on duration models, we construct a time series of the firm-level labour supply elasticity and estimate its relationship to the aggregate unemployment rate. In line with theory, we find that firms possess more monopsony power during economic downturns, which shows to be robust to controlling for time-invariant unobserved worker heterogeneity. We also document that cyclical changes in workers' entry wages are of similar magnitude as those predicted under monopsonistic wage setting, suggesting that monopsony power should not be neglected when analysing wage cyclicality.