Labor Markets With A Dominant Employer Experience Brain Drain

If you are a worker, you will tend to be paid better if you work in a place with multiple suitable employers for someone with your skills. If your good at what you do, on average you will be more likely to move from a place with only one major employer who can employ you to someplace where there is competition to gain access to your skills. 

Company towns, in contrast, tend to depress wages, experience brain drain, and find themselves left with the bottom of the barrel workers. This is good for employers who don't need top quality workers (such as some kinds of factory owners), like Tesla's new battery factory town. But this creates a lose-lose situation for many kinds of employers whose productivity hinges on the high quality of their workers, even though high quality workers are more expensive in a town with competition for the best employees.

Over the last thirty years, there has been a rise in several empirical measures of local labor market monopsony power. The monopsonist has a profit incentive to offer lower wages to local workers. Mobile high skill workers can avoid the lower monopsony wages by moving to other more competitive local labor markets featuring a higher skill price vector. We develop a Roy Model of heterogeneous worker sorting across local labor markets that has several empirical implications. Monopsony markets are predicted to experience a “brain drain” over time. Using data over four decades we document this deskilling associated with local monopsony power. This means that observed cross-sectional wage gaps in monopsony markets partially reflects sorting on worker ability. The rise of work from home may act as a substitute for high-skill worker migration from monopsony markets.

Matthew E. Kahn and Joseph Tracy, "A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist" NBER Working Paper 31014 (March 2023) DOI 10.3386/w31014