Labor Market Monopsony Power and the Dynamic Gains to Openness Reforms

ABSTRACT We embed labor market monopsony into a dynamic heterogeneous‐firm general equilibrium model with exporting, horizontal FDI, and rich firm lifecycle dynamics. Rising marginal costs with monopsony slow and limit incumbent firm growth in response to liberalization, shifting adjustment to the extensive margin. Calibrated to US micro data, welfare gains from tariff reduction are over four times larger under monopsony than with perfect labor markets. The difference is mostly driven by new exporter creation and firm entry along the transition path. By contrast, lowering outward FDI taxes gives powerful quantitative welfare losses under monopsony, as firms undertake FDI to escape domestic wage pressure.