Sergio Inferrera (Queen Mary University of London)
Spatial wage inequality reflects not only productivity differences but also spatial variation in labor market power. Using UK data, I document that low-productivity cities exhibit stronger monopsony power and higher firm entry rates. Exploiting the 2010 austerity reform as an exogenous shock, I show that increases in monopsony power induce firm creation and survival. I develop a spatial model where firms sort across cities with heterogeneous labor market conditions. The model reveals that monopsony heterogeneity curbs between-city wage differences by distorting firm location: stronger monopsony attracts productive firms to low-wage areas, compressing the spatial wage distribution but reducing aggregate output.