STEG Working Paper Series Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy, Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household

Labor Market Power, Self-Employment, and Development

WP016 AmodioMedinaMorlacco LaborMarketPowerSelfEmploymentAndDevelopment REVApr23.pdf

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This paper shows that self-employment shapes labor market power in low-income countries, with implications for industrial development. Using Peruvian data, we show that wage-setting power increases with concentration, but less so where self-employment is more prevalent. We build a general equilibrium model of oligopsony with worker sorting between wage work and self-employment. Concentration depresses wages, but selfemployment increases workers’ sensitivity to wage changes, curbing labor market power. Policies to create salaried jobs make self-employment less attractive, reducing labor supply elasticity and increasing markdowns. Counterfactual analyses show that eliminating labor market power can boost industrial policy effectiveness by up to 60%.

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