Employment relationships, wage setting, and labor market power

Francesco Agostinelli, Domenico Ferraro, Giuseppe Sorrenti and Leonard Treuren

No 779664, Working Papers of Department of Management, Strategy and Innovation, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven

Abstract: We ask to what extent the quantification of labor market power depends on the modeling of the long-term worker-firm employment relationship. We develop an oligopsony model with dynamic wage contracts. Workers decide whether and where to work, choosing among firms providing different amenities and solving a dynamic discrete choice labor supply problem with firm-specific human capital. As a result, firms optimally choose wage-tenure contracts to attract and retain workers. We find that such contracts mitigate firms' incentives to impose large instantaneous wage markdowns—compared to standard static wage-setting models—thereby reducing the share of socially inefficient worker-firm separations. As a consequence, we show that the empirical approaches based on "sufficient statistics" tend to overestimate the extent of labor market power: low levels of firm-specific labor supply elasticities do not necessarily indicate rent extraction, but instead reflect firms’ ability to retain workers by offering long-term value through human capital accumulation.

Keywords: STG/23/026#57790427 (search for similar items in EconPapers)
Pages: 60
Date: 2025-10-01
Note: paper number w34439
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Forthcoming in NBER Working Paper Series

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