Monopsonistic Wage-setting and Monetary Policy

RePEc Short ID: pva357
ORCID iD: 0000-0002-8972-523X

Kurozumi, Takushi; Sugioka, Yu; Van Zandweghe, Willem

doi:10.26509/frbc-wp-202524

Working Paper

Monopsonistic Wage-setting and Monetary Policy

Abstract: Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth.

JEL Classification: E24; E52; J42;

https://doi.org/10.26509/frbc-wp-202524