The Policy Research Working Paper 10388 titled "Product Market Monopolies and Labor Market Monopsonies" by Massimiliano Calì and Giorgio Presidente explores the novel externality of product market regulation in the labor market. The paper presents both theoretical and empirical evidence suggesting that higher barriers to entry in product markets lead to higher employers' labor market power, measured by the wage markdown - the ratio between the marginal product of labor and the wage.
The authors propose that this relationship can distort factor allocation, potentially resulting in lower aggregate output and employment, while also increasing inequality by reducing the labor share of national output. Using a simple oligopsony model, they illustrate how higher entry costs reduce the equilibrium number of firms, thereby limiting employment options for workers and decreasing their labor market power.
Empirically, the paper uses variations in investment restrictions across 346 manufacturing product markets in Indonesia. The analysis reveals that wage markdowns increase by approximately 25% in product markets subject to investment restrictions. Instrumental variable estimates further support the model's prediction that lower entry is the main driver of the positive relationship between investment restrictions and wage markdowns.
The study highlights the importance of understanding the determinants of labor market power, as it can potentially have significant implications for addressing distortions in modern economies. The findings suggest that policies aimed at regulating product markets might indirectly influence labor market dynamics, offering a new perspective on potential policy tools to mitigate labor exploitation and rising inequality.
The research contributes to several streams of literature, including those examining labor market concentration, oligopsony power in labor markets, and the role of policy in addressing market distortions. It provides a framework for policymakers interested in exploring the interplay between different market structures and their impacts on broader economic outcomes.
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