Labor Market Imperfections and the Firm's Wage Setting Policy

34 Pages Posted: 1 Oct 2016

See all articles by Sónia Félix

Sónia Félix

New University of Lisbon - Nova School of Business and Economics

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

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 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 firm's monopsony power affects negatively the earnings of its workers and firm's total factor productivity is considerably associated with higher earnings, ceteris paribus. We also find that firms use monopsony power for wage differentiation between male and female workers.

Keywords: monopsony, wage setting, labor market frictions

JEL Classification: J31, J20, J42

Suggested Citation

Félix, Sónia and Portugal, Pedro, Labor Market Imperfections and the Firm's Wage Setting Policy. IZA Discussion Paper No. 10241, Available at SSRN: https://ssrn.com/abstract=2846332

Sónia Félix (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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