Immigration, Monopsony and the Distribution of Firm Pay

The arrival of migrants with low reservation wages strengthens the monopsony power of firms. Firms can exploit this supply of “cheap” migrant labor by offering lower wages, though at the cost of forgoing potential native hires who demand higher pay. This monopsonistic trade-off can lead to large negative effects on native employment, which are concentrated among low-paying firms.

To validate these predictions, we study changes in wage premia and employment across the firm pay distribution, during a large immigration wave in Germany. These adverse effects can be mitigated through policies which constrain firms’ monopsony power over migrants directly, such as collective bargaining, or indirectly, such as policies that facilitate the labor market integration of migrants.

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