A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist


Over the last thirty years, there has been a rise in several empirical measures of local labor market
monopsony power. The monopsonist has a profit incentive to offer lower wages to local workers.
Mobile high skill workers can avoid the lower monopsony wages by moving to other more
competitive local labor markets featuring a higher skill price vector. We develop a Roy Model of
heterogeneous worker sorting across local labor markets that has several empirical implications.
Monopsony markets are predicted to experience a “brain drain” over time. Using data over four
decades we document this deskilling associated with local monopsony power. This means that
observed cross-sectional wage gaps in monopsony markets partially reflects sorting on worker
ability. The rise of work from home may act as a substitute for high-skill worker migration from
monopsony markets.

The full study can be viewed at National Bureau of Economic Research..

Tracy, & Kahn, M. E. (2023). A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist. NBER Working Paper Series.

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