Annual Review of Economics

Nowcasting consumer price inflation using high-frequency scanner data: evidence from Germany

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Key Points: 

    Demographics, labor market power and the spatial equilibrium

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    tisdag, februari 13, 2024
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    Abstract

    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?