Demographics, labor market power and the spatial equilibrium

Abstract

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ECB

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https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2906~5da887294e.en.pdf

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tisdag, februari 13, 2024

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Diamond, Bias, Azar, Technical report, Annual Review of Economics, Princeton University, Education, Population growth, Interval (mathematics), House, Labour economics, SSRN, J11, SIAB, Medical classification, Human resources, Automation, R2, Section 2, FE, CEPR, Probability, Literature, Workforce, Housing, Reproduction, Research Papers in Economics, Male, Classification, Supply chain, A.2, Section, Political economy, BHP, Sokolov, Calibration, Journal of Labor Economics, Journal of Political Economy, Social Security, Schaffner, Selection bias, Yi, Sample, Inequality, Employment, Paper, Princeton University Press, Theory, Woman, Daron Acemoglu, American Economic Review, XN, Shock, National Academies Press, Female, Retirement, Section 5, Manning, Central bank, National academy, European Central Bank, Section 4, Labor share, IEB, Bachmann, David Berger, Research, Federal Reserve Bank, JEL, Elasticity, Workplace, Section 3, Welfare, Journal of Urban Economics, National Research Council, Projection, Fertility, A4, University Press, Feedback, Market power, Converge, Concentration, PDF, Policy, Click, Meta-analysis, Website, Unemployment, Social science, Quarterly Journal of Economics, ECB, Demography, Real estate

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HIRSCH, WASHINGTON, ERLING, GERMANY

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Key Points:

Abstract
This paper studies how demographics affect aggregate labor market power, the urban wage
premium and the spatial concentration of population.
I develop a quantitative spatial model
in which labor market competitiveness depends on the demographic composition of the local
workforce.
If these factors differ across workers, labor market power has a role to
play in explaining wage inequality.
This paper contributes to the literature on differences in labor market power by analyzing a
new dimension of heterogeneity: demographics.
Since older workers are less mobile in terms of
switching workplaces, firms have more labor market power over older workers.
I start by estimating labor market power by measuring the sensitivity of worker turnover to
the wage paid.
I find a strong
role of demographics in determining the degree of labor market power enjoyed by firms.
Next, I provide evidence of the importance of differences in labor market power for spatial
wage inequality.
To explore the consequences of labor market sorting, I build a spatial general equilibrium
model in which labor market competitiveness depends on the demographic composition of the
ECB Working Paper Series No 2906

2

local workforce.
If these factors differ across workers, labor market power has a role to
play in explaining wage inequality.
In
the model, geographic sorting by age matters and leads to higher labor market power in rural
areas, which implies an urban wage premium that is 4% larger than with uniform labor supply
elasticities.
I follow Manning (2013) and estimate labor market power by measuring the sensitivity of worker
turnover to the wage paid.
Bachmann et al., 2021; Ahlfeldt et al., 2022a; Berger et al.,
2022) that nest a monopsonistic labor market in a spatial general equilibrium model (Redding
and Rossi-Hansberg, 2017).
As firms have more labor market power
over older workers, they face an upward-sloping labor supply curve that is less elastic in regions
with an older workforce.
Firms choose in which labor market to operate in the sense that there is free
entry at fixed costs into all locations.
How are differences in labor market competitiveness across space sustained in spatial equilibrium?
I use the model to quantify the importance of heterogeneity
in labor market power for the urban wage premium and the spatial concentration of population.
My work is complementary to but quite different
from this paper since I argue that population aging increases labor market power rather than
product market power.
By analyzing the effects of a changing age composition of the workforce in the context
of labor market power, I relate to literature on the labor market effects of population aging.
ECB Working Paper Series No 2906
7

after controlling for age, differences in labor market power between East and West Germany
vanish.
They conclude that higher
concentration is associated with higher labor market power (as in the model of Jarosch et al.,
forthcoming).
I offer an alternative explanation why labor market power differs across regions:
Since denser regions have a younger workforce, workers are more mobile in terms of switching
jobs which implies lower labor market power of firms.
In this case, I infer a
high labor supply elasticity and low labor market power of firms.
I contribute to this growing debate by
quantifying differences in labor market power across worker groups and their effects on regional
inequality.
While the model shows how demographics affect labor market power, the urban wage premium and agglomeration, one fundamental question remains open for future research: What
are the policy implications of (differences in) labor market power?