Monopsony Power and Creative Destruction (joint with Isabella Maassen and Filip Mellgren)
2024
In the U.S., the last decades have seen a rise in concentration and decrease in economic growth. Over the same time period, shifts in labor market power and income tax regimes have occured. This paper connects these developments. We identify labor supply elasticities as an important factor for market concentration. Higher elasticities further the expansion of large, productive firms. We argue that this expansion may increase efficiency in production while at the same time decreasing it in innovation. We show that income taxation plays into this, with decreases in progressivity increasing market concentration. Embedding monopsonic labor markets in a model of economic growth, we quantify these effects. We identify key channels through which historical tax reforms affected output and present evidence that a more progressive tax regime increases long-run productivity growth.