Title: Labor Market Power in Sub-Saharan Africa: The Effect of Small Firms, Self-Employment, and Migration

Abstract: How competitive are labor markets in Sub-Saharan Africa, and how does the level of competition differ between rural and urban markets? Unlike developed countries, labor markets in developing countries are characterized by a large number of small firms, high rates of self-employment and costly migration. I develop a general equilibrium spatial monopsony framework that accounts for each of these features. I find that labor market power is concentrated in rural areas where there are fewer firms and workers face higher migration costs. Less competitive wages in rural areas causes a misallocation of workers into self-employment, and leads the rural-urban income gap to overstate differences in productivity. However, self-employment plays an important role in diminishing labor market power, particularly in rural areas. In the counterfactual exercise in which I remove migration frictions, total output increases by 23%. This change is driven almost entirely by reallocation across space and not across sectors. This suggests that, above all, self-employment plays a dual role, mitigating labor market power while simultaneously reallocating labor into less productive work.