THE EMPLOYER SIZE-WAGE EFFECT: CAN DYNAMIC MONOPSONY PROVIDE AN EXPLANATION?

Abstract

In this paper we argue that a dynamic monopsony model (based on labour market frictions) predicts a positive relationship between wages and employer size, but also that the effect will be larger in the non-union sector than in the union sector, and larger for women than for men. We examine evidence on the employer size-wage effect using several microeconomic data sources, and find it to be generally consistent with these predictions. After examining other theoretical explanations, our conclusion is that at least part of the employer size-wage effect is a result of monopsony power in the labour market.