Monopsony in labor markets: Not important in the aggregate

Abstract

I construct a New Keynesian dynamic stochastic general equilibrium model, where labor market power and wage rigidities arise partly on the labor demand and partly on the labor supply side. In particular, households supply two types of labor, one where labor market power lies with households as in the standard setup and one where labor market power lies with firms (i.e., monopsony). Estimations using Bayesian likelihood methods indicate that the fit of the hybrid model is slightly better than the standard setup in the literature with labor market power modeled fully on the household side. However, the estimated share of labor operating in monopsonistic markets is relatively small (about 12%), and thus, the hybrid model generates very similar dynamics to the standard setup.