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Monopsonistic Wage-setting and Monetary Policy
Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic substitutability in wage-setting, and that the second-order approximation to households' utility functions is of the same form but with a smaller welfare weight on wage growth variability. Consequently, a welfare-maximizing policy features stabilizing inflation rather than wage growth.
Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.
Suggested Citation
Kurozumi, Takushi, Willem Van Zandweghe, and Yu Sugioka. 2025. “Monopsonistic Wage-setting and Monetary Policy.” Federal Reserve Bank of Cleveland, Working Paper No. 25-24. https://doi.org/10.26509/frbc-wp-202524
This work by Federal Reserve Bank of Cleveland is licensed under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
