How would a monopsony employer hurt labor? A simple dynamic model

Chiu Yu Ko; Charles Ka Yui Leung

doi:10.1016/j.econmod.2026.107716

How would a monopsony employer hurt labor? A simple dynamic model

Chiu Yu Ko^*
, Charles Ka Yui Leung

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

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Abstract

A debate has emerged over the growing market power of large firms and its implications for labor markets. Our simplified model shows that monopsony employers hire fewer workers and set wages below the socially optimal level, generating what is called incentive-driven unemployment. Although this structure encourages worker effort, it also compresses wages, producing smaller differentials among workers — both within and across firms — than their productivity differences would warrant. In equilibrium, income inequality is excessive, labor is misallocated, and the job-finding rate is lower than the social optimum. Our numerical examples demonstrate the economic significance of these effects and illustrate realistic labor-market dynamics and plausible micro wage–productivity elasticities. © 2026 The Authors.

Original language	English
Article number	107716
Number of pages	14
Journal	Economic Modelling
Volume	163
Online published	6 Jun 2026
DOIs	https://doi.org/10.1016/j.econmod.2026.107716
Publication status	Online published - 6 Jun 2026

Funding

We are grateful to Pak Hung Au, Sambuddha Ghosh, Eric Hanushek, Hong Huang, Fred Kwan, Ed Lazear, David Leung, Ying Zhou, especially Angus Chu (the Editor), seminar participants of the Econometric Society meeting, Society for the Advancement of Economic Theory (SAET) meeting, National Taiwan University for valuable comments. Part of the research was conducted when Leung visited the Hoover Institution, whose hospitality is gratefully acknowledged. Chiu Yu Ko acknowledges support from the National Natural Science Foundation of China (Grant 72394395). We also thank the Chinese University of Hong Kong and the City University of Hong Kong for their financial support. The usual disclaimer applies.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 1 No Poverty
SDG 8 Decent Work and Economic Growth
SDG 10 Reduced Inequalities

Research Keywords

Excessive inequality
Increasing market concentration
Monopsony power
Productivity difference
Repeated moral hazard
Under-employment
Under-pay

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This full text is made available under CC-BY 4.0. https://creativecommons.org/licenses/by/4.0/

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How would a monopsony employer hurt labor? A simple dynamic model

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UN SDGs

Research Keywords

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