Estimating Labor Market Power


How much power do employers have to suppress wages below marginal productivity? It depends on the firm-level labor supply elasticity. Leveraging data on job applications from the large job board, we estimate the wage impact on workers’ choice among differentiated jobs in the largest occupations. We use a nested logit model of worker’s utility for applying to jobs with varying wages and characteristics, including distance from the potential worker’s home. We account for the endogeneity of wages by using several different instrumental variable strategies. We find that failing to instrument results in implausibly low elasticities, whereas plausible instruments result in more elastic estimates. Still, the implied market-level labor supply elasticity is about 0.6, while the firm-level labor supply elasticity is about 5.8. This implies that workers produce about 17% more than their wage level, consistent with employers having significant market power even for the largest occupational labor markets.