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Labor Market Power with Worker and Firm Heterogeneity
How do firms set wages? How should governments set income taxes? If labor supply is inelastic to wages, firms can pay workers less than their marginal products, and governments can increase taxes without eroding the base. However, the structure of labor supply elasticities in the economy is complex. Recent empirics document variation across workers, firms, and margins (which firm to work at versus how many hours to work). To account for this rich structure of labor supply elasticities we extend the neoclassical model to include a discrete choice over which firm to work at, production ...