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15 March 2022

Monopsony in local labour markets

In this commentary, we propose a monopsony model of the labour market in which market power stems from idiosyncratic worker preferences over non-wage attributes of jobs. In this set-up, the relationship between wages and employment concentration arises from aggregation of firm-level elasticities of labour supply at the market level, with weights given by firms’ employment shares. Next, we extend the model to account for worker mobility across labour market segments, leading to spatial labour markets that are continuous and overlapping, as in the framework of Manning and Petrongolo (2017), and we compare the resulting concentration index with the one obtained in a model that assumes self-contained labour markets. Finally, we show a simple application of this model extension on UK data, by measuring model-based and purely local concentration indices in England and Wales and estimating their relationship to local wages. We characterise labour market segments based on 8,848 Census wards, and estimate mobility patterns across wards based on worker commuting flows from the 2011 Census of Population. We find that labour market concentration would be much overstated if one did not take into account worker mobility across wards, and that the concentration index obtained on overlapping local labour markets is negatively and significantly correlated to local wages, leaving very little explanatory power to the purely local index.

Cite this as:

Manning, A. and Petrongolo, B. (2022), ‘Monopsony in local labour markets’, IFS Deaton Review of Inequalities,