Labor Market Power and Development

Imperfect competition in labor markets can lead to efficiency losses and lower aggregate output. This paper examines how variations in labor market competitiveness may account for differences in GDP per capita among countries. By structurally estimating an oligop-sony model with free entry across different development stages, we find that labor market power increases with GDP per capita. Wage markdowns vary from 54 percent in low-income countries to around 24 percent in the richest ones. If labor markets in poorer countries were as competitive as in more developed ones, their output per capita could rise by up to 44 percent. (JEL E23, J22, J31, J42, L13, L25, O47)