Labor Market Power and Development


Imperfect competition in labor markets can lead to efficiency losses and lower aggregate output. This paper examines how variations in labor market competitiveness may account for differences in GDP per capita among countries. By structurally estimating an oligopsony model with free entry across different development stages, we find that labor market power increases with GDP per capita. Wage mark-downs vary from 54% in low-income countries to around 24% in the richest ones. If labor markets in poorer countries were as competitive as in more developed ones, their output per capita could rise by up to 45%.