Abstract
I analyze how a firm’s labor market power shapes, and is shaped by, its workforce, and I evaluate the implications for welfare and inequality. Using matched worker-firm panel data from Norway (1995-2018), I develop, identify, and estimate an equilibrium model of the labor market where firms compete with one another for workers who are heterogeneous in both their skills and preferences over wages versus non-wage job amenities. I allow the wage-amenity trade-offs to be correlated with skills, while also varying among equally skilled workers. When a firm adjusts its wages, the composition of its workforce shifts, and these compositional changes, in turn, affect the labor supply curve to the firm. As a result, the firm’s wage-setting power varies based on which types of workers it employs. I find that this variation leads to large allocative inefficiency, with welfare losses from imperfect competition estimated at 9.5% relative to the competitive benchmark.

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