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Quantitatively, differences in the degree of monopsony account for 42% of observed variation in GDP per capita across countries. At least one-third of the losses are attributable to distorted entrepreneurial decisions and lack of innovation.

Because it penalises high-productivity employers, labor market power acts as a skill-biased force, similar to what has been shown for a wide array of size-dependent policies and correlated distortions.

The other two channels operate through selection into entrepreneurship and investment decision: lack of competition allow low-productivity individuals to reap high benefits from entrepreneurship, and lowering the returns from climbing the productivity ladder.

The first channel operates through the static allocation of workers: lower competition increases the marginal factor cost only for a subset of entrepreneurs with sufficiently high productivity, spurring employment reallocation towards less-productive, lower-paying employers.

We build a dynamic general equilibrium model of neoclassical monopsony with occupational choice, firm growth, and productivity-enhancing investment. We show that labor market power lowers efficiency and leads to aggregate output losses through three different channels.