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Labor market imperfections and the firm’s wage setting policy

Pedro Portugal and Sónia Félix

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We use matched employer-employee data and firm balance sheet data to investigate the importance of firm productivity and firm labor market power in explaining firm heterogeneity in wage formation. We use a linear regression model with one interacted high dimensional fixed effect to estimate 5-digit sector-specific elasticity of output with respect to input factors directly from the production function. This allows us to derive firm specific price-cost mark-up and elasticity of labor supply. The results show that firms possess a considerable degree of product and labor market power. Furthermore, we find evidence that a firm’s monopsony power negatively affects the earnings of its workers, and firm’s total factor productivity is closely associated with higher earnings, ceteris paribus. We also find that firms use monopsony power for wage differentiation between male and female workers.

JEL-codes: J21 J30 J42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lma and nep-ltv
Date: 2017
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Working Paper: Labor Market Imperfections and the Firm's Wage Setting Policy (2016) Downloads
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