This paper shows that self-employment shapes the market power of employers in low-income countries, with implications for industrial development. Using data from Peru and a rural electrification program for identification, we find that labor market power increases with employer concentration, but to a lesser extent where self-employment is more prevalent. To understand these patterns, we build a general equilibrium model of oligopsony with endogenous entry and worker sorting between wage work and self-employment. Concentration depresses wages, but self-employment opportunities increase workers’ sensitivity to wage changes, curbing labor market power. Policies designed to create salaried jobs make self-employment less attractive and reduce the workers’ wage elasticity, increasing markdowns and leading to only mild effects. Eliminating labor market power could increase wage employment by 11 percentage points, raise wages by 31%, and boost the effectiveness of industrial development policies by up to 60%.
STEG Working Paper • 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