Leonardo Peñaloza-Pacheco (Cornell University)

Leonardo Peñaloza-Pacheco
Cornell University

Abstract

I study how migration affects firm behavior in a non-competitive framework in which wages reflect both labor productivity and firm market power in labor and product markets. Using an instrumental variables approach and exploiting the Venezuelan exodus to Colombia, I examine how the inflow of migrants affected wages, labor market power, and product market power in the Colombian manufacturing sector. I show that migration increased firm labor productivity but did not raise wages because firms increased their wage markdowns in response to the larger labor supply. I document a new mechanism through which labor market power can be affected by migration: migrants’ entry into the self-employment sector reduced its value as an outside option for manufacturing workers, strengthening firms’ labor market power. At the same time, the arrival of low-income migrants shifted the local income composition of demand toward lower-income consumers, weakening firm product market power and lowering price mark-ups—an effect that would have increased wages absent rising labor market power. Together, these findings show that migration can reshape both sides of market power—markdowns and mark-ups—generating distributional consequences that competitive models cannot capture.

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