Working Paper: NBER ID: w27325
Authors: Kory Kroft; Yao Luo; Magne Mogstad; Bradley Setzler
Abstract: Existing work on imperfect competition typically focuses on either the labor market or the product market in isolation. In contrast, we analyze imperfect competition in both markets jointly, showing theoretically and empirically that focusing on one market in isolation may result in a limited or misleading picture of the degree and impacts of market power. Our empirical setting is the US construction industry. We develop, identify and estimate a model where construction firms imperfectly compete with one another for workers in the labor market and for projects in both the private market and the government market, where government projects are procured through auctions. Our analyses combine the universe of business and worker tax records with newly collected records from government procurement auctions. We use the estimated model to quantify the markdown of wages and the markup of prices, to show that the impacts of an increase in market power in one market are attenuated by the existence of market power in the other market, and to quantify the rents, rent-sharing, and incidence of procurements in the US construction industry.
Keywords: Imperfect Competition; Labor Market; Product Market; Construction Industry; Market Power
JEL Codes: D44; J31; J42; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in labor supply elasticity (J49) | Decrease in number of workers (J63) |
| Reduction in labor supply elasticity (J49) | Decrease in wages (J31) |
| Lack of price-setting power in product market (L11) | Decrease in number of workers (J63) |
| Lack of price-setting power in product market (L11) | Decrease in wages (J31) |
| Winning a procurement auction (D44) | Increase in earnings per worker (J31) |
| Winning a procurement auction (D44) | Increase in number of employees (J23) |
| Markdown of wages due to market power (J31) | Wages relative to marginal product of labor (J31) |
| Markup of prices due to market power (D49) | Prices relative to production costs (L11) |