Over the last decades, and in almost all advanced economies, industry concentration has increased steadily. The market share of a few large firms has been rising at the expense of smaller firms. As concentration increases, firms can charge prices that are well above production costs. Yet, these changes in market structure do not only affect the output market, but also the market for inputs, and labour in particular. A natural question that arises is whether developing countries are experiencing or will experience such trends. Well-functioning markets are crucial for the development of a vibrant private sector that can foster economic growth. A competitive labor market is essential to let the benefits of such growth be shared by workers as much as by firm and capital owners, lifting the poorest segment of the population out of poverty. The objective of this project is to investigate the extent of monopsony power – market power of buyers – of firms in the labour market in developing countries
The authors obtain estimates of market imperfections by estimating the production function of firms, while accounting for the possibility that firms have market power in both input and output markets. The price and quantity information of firms’ input and output contained in the Peruvian data are uniquely suitable for this kind of analysis. In the first step, they plan to implement this methodology using unique firm-level data from the Peruvian Economic Survey (EEA) over the period 2000 to 2015. In the second step of the analysis, they will investigate the extent of spatial variation of monopsony power across the country, and relate it to local labor market conditions using the Peruvian National Household Survey (ENAHO) over the period 2005 to 2015. Finally, they plan to exploit China’s accession to the WTO as a source of exogenous variation in the product mix, employment, and wages of Peruvian firms. China’s accession did not affect all sectors in the Peruvian economy in the same way. A basic distinction is between the tradable and non-tradable sector. The authors will therefore expect changes in market structure to be more sizeable in certain local labor markets than in others. This will estimate the effect of trade liberalization on labor market structure, which is crucial to better understand its distributional effects in the economy.
This project is highly policy-relevant. It aims to evaluate the extent to which lack of competitiveness on the demand side of the labor market affects local labor market outcomes, and the extent to which the value-added generated in the private sector in developing countries is shared by workers as much as by firm and capital owners. Peru is classified by the World Bank as an upper-middle income country yet this project will provide insights that are critical for the understanding of the private sector in low-income countries. First, the spatial distribution of economic activity in Peru is similar to the one of many developing countries, with a vibrant agglomeration of firms in the capital, Lima, and less concentration of firms the rural parts of the country. Second, Peru has a large informal sector and relatively low levels of labor mobility. These are critical features of low-income countries that are essential to understand heterogeneity in the way local labor markets react to shocks. Third, and most importantly, the firm-level and household-level data used here will provide information on all the above features across the entire country, which would be typically unfeasible in pure low-income contexts.
