Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/316934 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11820
Publisher: 
CESifo GmbH, Munich
Abstract: 
Monopsonistic labor markets create misallocation of labor while generating profits. These in turn incentivize firms to innovate, which drives aggregate growth. This paper explores the trade-off between static efficiency and growth by developing a tractable endogenous growth model with heterogeneous firms and upward sloping labor supply curves. We show that monopsony can rationalize the prevalence of unproductive yet innovating firms that would otherwise be crowded out by more productive competitors. Our model calibrated to U.S. data confirms previous findings that imperfectly competitive labor markets distort static efficiency. However, we find that monopsony also leads to higher growth. On balance, we estimate that a 1% narrowing of the markdown increases the present value of output by about 1.08%.
Subjects: 
monopsony power
creative destruction
productivity
innovation
economic growth.
JEL: 
O31
O47
J42
E24
Document Type: 
Working Paper
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