Demographics, labor market power and the spatial equilibrium
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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 theECB Working Paper Series No 2906
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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
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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?