large firms, due to their difference in scale, so as to observe the dynamics for small and medium firms more clearly. Medium firms registered a cyclical movement in real wages. However, small firms registered a downward spiral in real wages over the decade. As argued above, while there is little variation in employment level for small and medium firms, both categories resorted to compressing wages, more intensively by small firms than medium ones.<sup>15</sup> Figure 4 suggests that the main mechanism through which small and medium firms exercise monopsony power is by paying low real wages to their workers. Indeed, the lack a formal theory to explain this mechanism is a limitation of the present article. However, some possible factors underlying the mechanism will be discussed here. One key piece of anecdotal evidence is the configuration of the labor market. Smaller and less productive firms saw the largest decline in product market markups in the aftermath of trade liberalization. The increased competition meant smaller firms had to reduce prices. As predicted by industrial organization theories, the declining profits would have eventually forced these firms out of the market.

In a bid to delay their exit from the market or revert the trend of shrinking profits, smaller firms reduce their real wages paid to their workers as a strategy to cut cost. The ‘success’ of this strategy was aided by conditions in the labor market that affect workers response on the supply side. Labor market conditions such as lack of alternative job opportunities hinder the response of workers to the change in real wages. Using a matched employee-employer version of the same data analyzed in this article, Verner (1999) found that Ghanaian workers are undercompensated compared with their productivity.

Verner list possible reasons why Ghanaian workers do not demand higher wages. First, they may not be entirely aware of the magnitude of the effect their acquired skills and education have on productivity. Secondly, there had been a high incidence of job losses. Hence, demanding higher wages can lead to job insecurity among Ghanaian workers. This, therefore, suggests that the real wage labor supply tend to be inelastic, paving the way for smaller firms to exercise monopsony power over their workers.

While the above conceptualization clarifies, to some extent, how firms could exercise monopsony power, it may still seem puzzling why large firms do not take advantage of the labor market conditions to also exercise monopsony power. Blunch and Verner (2004) using a matched employee-employer version of the same dataset used in this article, demonstrated asymmetries in wage premium for unionized workers versus their un-unionized colleagues in Ghana. They estimated a union wage premium of 41.3 percent for workers at the bottom decile.

From the data, 86 percent of workers in large firms are unionized against 28 percent and 5 percent for medium and small firms, respectively. So while unionized workers are able to negotiate for higher wages, this premium is only limited for workers in large firms. Therefore, it is likely that large firms do not exercise monopsony power because their workers can participate in wage-setting negotiations, whereas workers in smaller firms do not have such negotiating power.

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