Monopsonistic Wage-setting and Monetary Policy

Takushi Kurozumi, Yu Sugioka and Willem Van Zandweghe

No 25-24, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth.

Keywords: labor market monopsony; wage markdown; strategic substitutability; staggered wage-setting; timeless-perspective policy; inflation stabilization (search for similar items in EconPapers)
JEL-codes: E24 E52 J42 (search for similar items in EconPapers)
Pages: 53
Date: 2025-11-19
New Economics Papers: this item is included in nep-cba, nep-com, nep-lma, nep-mon and nep-upt
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DOI: 10.26509/frbc-wp-202524

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