Estimating the Wage Elasticity of Labour Supply to a Firm: Is there Monopsony Down-under?
AbstractIn this paper we estimate the elasticity of the labour supply to a firm, using data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Estimation of this elasticity is of particular interest because of its relevance to the debate about the competitiveness of labour markets. The essence of monopsonistically competitive labour markets is that labour supply to a firm is imperfectly elastic with respect to the wage rate. The intuition is that, where workers have heterogeneous preferences or face mobility costs, firms can offer lower wages without immediately losing their workforce. This is in contrast to the perfectly competitive extreme, in which the elasticity is infinite. Therefore a simple test of whether labour markets are perfectly or imperfectly competitive involves estimating the elasticity of the labour supply to a firm. We do this, following the modelling strategy of Manning (2003), and find that the Australian wage elasticity of labour supply to a firm is around 0.71, only slightly smaller than the figure of 0.75 reported for the UK. These estimates are so far from the perfectly competitive assumption of an infinite elasticity that it would be difficult to make a case that labour markets are perfectly competitive.
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Bibliographic InfoPaper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 626.
Date of creation: Dec 2009
Date of revision:
monopsony; imperfect competition; separation; labour supply elasticity;
Other versions of this item:
- Booth, Alison L. & Katic, Pamela, 2010. "Estimating the Wage Elasticity of Labour Supply to a Firm: What Evidence Is There for Monopsony?," IZA Discussion Papers 5167, Institute for the Study of Labor (IZA).
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-20 (All new papers)
- NEP-BEC-2010-02-20 (Business Economics)
- NEP-LAB-2010-02-20 (Labour Economics)
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