Abstract
This paper examines how a firm’s labor market power shapes, and is shaped by, its workforce, and evaluates the implications for wage inequality and welfare. Using matched worker-firm panel data from Norway (1995-2018), I develop, identify, and estimate an equilibrium model of the labor market where firms compete for workers who are heterogeneous in both their skills and preferences over wages versus non-wage job amenities. When a firm adjusts its wages, the composition of its workforce shifts, which in turn affects the slope of its labor supply curve. As a result, a firm’s wage setting power varies based on which workers it employs. I use the model to draw inference about the incidence of wage markdowns and rents within and across firms, and the implications for wage inequality and sorting. Eliminating market power widens within-firm skill premia by 1.3% while compressing wage differences between firms by 16%, leading to a 4% reduction in total wage inequality and a 3.3 percentage-point (23% of the baseline) decline in the gender pay gap. Variation in wage setting power across firms also generates large allocative inefficiency, with welfare losses from labor market power estimated at 9.6% relative to the competitive benchmark.
The seminar will be held in room 1249 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.