Monopsony in Growth Theory

Pietro Garibaldi and Enrico Duilio Turri

No 19652, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The secular decline in the labor share and the long-run reduction in labor supply suggest that imperfect labor markets can play a role in long-run economic growth. Unlike rising markups, rising wage markdowns are compatible with a balanced growth path featuring declining labor share and constant capital-output ratio. We introduce oligopsony and oligopoly power in a neoclassical growth model with superstar firms and an inferior sector which represents workers' outside option. Faster TFP growth in the superstar sector with respect to the inferior sector generates an endogenously increasing markdown, the driver of growth misallocation. The model can be calibrated to simultaneously match the joint trends of GDP growth, declining labor share, and hours worked. For the US, the consumption-equivalent loss with respect to the optimal growth path is around 7.5 percent. An extension of the model with hand-to-mouth workers and capitalists delivers balanced growth with increasing inequality. While---in this context---proportional taxation distorts equilibrium labor supply, a rising minimum wage can restore efficient growth.

Keywords: Monopsony; Growth; Misallocation (search for similar items in EconPapers)
JEL-codes: J23 J30 J42 O40 O41 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-gro
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