The Extent of Imperfect Competition in Product & Labor Markets
by Roman Zarate & Dario Tortarolo
The question of whether labor markets and product markets are "imperfectly competitive" has a long tradition and has been typically approached separately for each market. The aim of the paper is to approach this question from a joint perspective and measure the extent of market power of firms in product and labor markets using production data. To this end, we develop a simple model to estimate markups and markdowns using a unified framework. The model guides the empirical analysis of the paper, which is based on firm-level and administrative microdata and a rigorous identification strategy. In the first stage, we combine tools from Industrial Organization and Labor Economics to estimate market power and policy-relevant elasticities. The identification comes from different sources of variation. In a second stage, we seek to establish links between markups, markdowns, and firm characteristics. In a final stage, we will study how firm-specific shocks (such as trade shocks) are distributed between firms and workers.