Monopsony power and the returns to skill

If labor markets are imperfectly competitive, the relationship between wages and productivity could be substantially different from what the bulk of the human capital literature has inferred using assumptions of perfect competition. This work develops an empirical and theoretical framework to measure the extent of firm market power over workers of different skill levels, and the wage differentials across skill levels that this power produces.;First, Chapter 2 fleshes out the boundaries between perfect and imperfect labor market competition. A non-zero correlation between quits and either wages or plant size is shown to be difficult to reconcile with firms setting wages equal to marginal products. This result is robust to several phenomena used to explain worker mobility, including renegotiation, matching, and firm specific skills.;The results of Chapter 2 are used in Chapter 3 to build a new approach to measuring the elasticity of the firm's cost curve for labor. Previous measurements have relied on sensitive firm data that is usually only available in case studies. In contrast, the approach developed here allows us to use data on firm and job characteristics that are commonly available in standard household datasets, so that we can measure the cost curve that a representative firm faces when hiring different groups of workers. The hypothesis of a perfectly elastic labor cost curve, implied by perfect competition, is rejected; overall firm labor cost elasticities are found to be in the 2.5--5 range.;Next, Chapter 4 develops a method for using these estimated elasticities to measure the size of rents firms earn from different groups of workers, and the role of such rents in compressing or amplifying the returns to general human capital. Results suggest that differences in rents across education groups, unrelated to productivity differences, explain between one sixth and one half of the college/high school wage differential.;Finally, Chapter 5 builds on Chapter 4 to develop a measurement of how firm rents change as workers gain seniority. Productivity is found to initially grow faster than wages, but wages begin to catch up to productivity at a high level of seniority.