Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers

Dube, Arindrajit; Manning, Alan; Naidu, Suresh

doi:10.1257/aer.20200678

Abstract

We show that administrative hourly wage data exhibits considerable bunching at round numbers. We run two experiments, randomizing wages around 10 cents and $1.00, to experimentally measure left-digit bias for identical tasks on Amazon Mechanical Turk, and fail to find any evidence of discontinuity in the labor supply function at round number, despite estimating a considerable degree of monopsony. We replicate these results in administrative worker-firm hourly wage data from Oregon. We can rule out inattention estimates found in the behavioral product market literature. We provide evidence that firms 鈥渕isoptimize" wage-setting. More monopsony requires less employer misoptimization to explain bunching.

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