Robinson Meets Roy: Monopsony Power and Comparative Advantage

Abstract:

We provide a number of insights into the nature and consequences of monopsony powerthroughthelensofcomparativeadvantage, whereemployers’powerinwage setting stems from match-specific rents. Chief among them is that employers will apply larger wage markdowns to workers with greater comparative advantage at their firm. This leads to stronger monopsony power over more productive workers, provided the workers’ comparative advantage aligns with their absolute advantage. UsingBrazilian administrative data, weconfirmthisprediction: monopsonydispro portionately affects high-wage workers within firms and workers at high-paying f irms. The model, calibrated to our estimates for Brazil, predicts that minimum wages increase both wages and formal employment for more productive workers while pushing less productive workers out of formal employment.