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Infrastructure Investment and Labor Monopsony Power

Wyatt J. Brooks (), Joseph Kaboski, Illenin O. Kondo (), Yao Amber Li () and Wei Qian ()
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Wyatt J. Brooks: Arizona State University
Illenin O. Kondo: Federal Reserve Bank of Minneapolis
Yao Amber Li: Hong Kong University of Science and Technology
Wei Qian: Shanghai University of Finance and Economics

IMF Economic Review, 2021, vol. 69, issue 3, No 2, 470-504

Abstract: Abstract In this paper, we study whether or not transportation infrastructure disrupts local monopsony power in labor markets using an expansion of the national highway system in India. Using panel data on manufacturing firms, we find that monopsony power in labor markets is reduced among firms near newly constructed highways relative to firms that remain far from highways. We estimate that the highways reduce labor markdowns significantly. We use changes in the composition of inputs to identify these effects separately from the reduction in output markups that occurs simultaneously. The impacts of highway construction are therefore pro-competitive in both output and input markets and act to increase the share of income that labor receives by 1.8–2.3 percentage points.

Date: 2021
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DOI: 10.1057/s41308-021-00144-6

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