This paper studies monopsony power in a low pay labour market and explores its determinants. I emphasise the role of the spatial distribution of activity and workers' distaste for commuting in generating imperfect substitutability between jobs, and heterogeneity in monopsony power. To formalise the role of commutes in generating monopsony power I develop a job search model where utility depends on wages, commutes and an idiosyncratic component. The model endogenously defines probabilistic spatial labour markets which are point specific and overlapping, and generates labour supply to the firm elasticities which vary across space. Distaste for commuting is shown to increase monopsony power, but does so heterogeneously, increasing monopsony power in rural areas more than in denser urban ones. Using detailed applicant data for a firm with hundreds of establishments across the UK, coupled with two sources of job-establishment level exogenous wage variation I estimate the model parameters and show that commutes generate considerable spatial heterogeneity in monopsony power and are responsible for approximately 1/3 of the total wage markdown. A decomposition exploiting the granularity of the model demonstrates that 40% of spatial variation in monopsony power is within Travel To Work Areas. Calculating employer concentration based on highly-granular 1km2 grids and probability of applying across grids based on pair-wise grid travel times shows how coarsely discretised labour markets such as Commuting Zones can cause sizeable mismeasurement in concentration measures.

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25 June 2024     Paper Number CEPDP2012

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This CEP discussion paper is published under the centre's Labour programme.