Description:
This paper integrates labor market power and occupational choice, specifically the choice between paid employment and self-employment, to examine the mutual effects between the two. Neglecting the consideration of occupational choice leads to upwardly biased estimates regarding the influence of labor market power on wages, while simultaneously underestimating the returns to skills. Similarly, disregarding labor market power results in biased estimates favoring increased participation in paid employment and higher-income individuals engaging in self-employment. The model employed in this paper allows for the investigation of how labor market power and occupational choice impact wage inequality, skill mismatch, and skills acquisition. Furthermore, the study examines the potential of minimum wages, taxes, and subsidies to mitigate labor market power and its associated consequences