Recent years have seen revived interest in the role of monopsony power in wage-setting in the public sector. Most evidence focuses on individual occupations rather than considering the implications for wage and employment structure where the state has differential monopsony power across different types of workers. A model of monopsony with heterogeneous workers is constructed here. A large scale 'natural experiment' of the consequences of declining monopsony power is the process of economic transition from communist regimes to market-based economies. The paper shows that many salient features of economic transition, such as increasing wage inequality, rising returns to education, rising public sector pay 'markups' and changing employment composition, are compatible with this 'story'.
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Richard Disney and Jelena Lausey
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