Abstract
We study the market power of employers in low-income countries, its relation with self-employment, and its implications for industrial development. Using data from Peru, we document substantial employer concentration and high self-employment rates across manufacturing local labor markets. Where employer concentration is higher, self-employment rates are higher, and the average earnings and education of self-employed and wage workers are lower. To interpret these facts, we build a general equilibrium model where labor market power arises from (i) strategic interactions among employers and (ii) sorting of heterogeneous workers across wage work and self-employment. We structurally estimate the model and quantify the relevance of these mechanisms for rent-sharing between workers and firms and for the effect of policies promoting manufacturing wage employment. We find that labor market power amplifies the transmission of shocks to wages, but worker sorting mitigates these effects. We also find that policies targeting firm entry costs, productivity, or workers’ skills have different aggregate and distributional consequences as changes in firm entry and worker sorting simultaneously affect labor market power.