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How Do Industries and Firms Respond to Changes in Local Labor Supply?

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  • Christian Dustmann

    ()
    (Department of Economics, University College London and CReAM)

  • Albrecht Glitz

    ()
    (Department of Economics and Business, Universitat Pompeu Fabra and CReAM)

Abstract

In this paper, we investigate how changes in the skill mix of local labor supply are absorbed by the economy. We distinguish between three adjustment mechanisms: through factor prices, through an expansion in the size of those production units that use the more abundant skill group more intensively, and through more intensive use of the more abundant skill group within production units. We investigate which of these channels is dominant. We contribute to the existing literature by analyzing these adjustments on the level of firms, rather than industries, and by assessing the role of new firms in the absorption process of labor supply shocks. Our analysis is based on administrative data, comprising the entirety of firms in Germany over a 10 year period. We find that, while factor price adjustments are important in the non-tradable sector, labor supply shocks do not induce factor price changes in the tradable sector. In this sector, most of the adjustment to changes in relative factor supplies takes place within firms by changing relative factor intensities. Given the non-response of factor prices, this finding points towards changes in production technology Our results further show, that firms that enter and exit the market are an important additional channel of adjustment. Finally, we demonstrate that an industry level analysis is likely to over-emphasize technology-based adjustments.

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Bibliographic Info

Paper provided by Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London in its series CReAM Discussion Paper Series with number 1118.

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Date of creation: Sep 2011
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Handle: RePEc:crm:wpaper:1118

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Keywords: Immigration; Endogenous Technological Change; Firm Structure;

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Cited by:
  1. Abdih, Yasser & Chami, Ralph & Dagher, Jihad & Montiel, Peter, 2012. "Remittances and Institutions: Are Remittances a Curse?," World Development, Elsevier, Elsevier, vol. 40(4), pages 657-666.
  2. Libertad González & Francesc Ortega, 2008. "How Do Very Open Economies Absorb Large Immigration Flows? Recent Evidence from Spanish Regions," Economic Reports 06-08, FEDEA.
  3. Ciccone, Antonio & Peri, Giovanni, 2013. "Schooling Supply and the Structure of Production: Evidence from US States 1950–1990," ADB Economics Working Paper Series, Asian Development Bank 377, Asian Development Bank.
  4. Christian Dustmann & Albrecht Glitz & Tommaso Frattini, 2008. "The labour market impact of immigration," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 24(3), pages 478-495, Autumn.
  5. González, Libertad & Ortega, Francesc, 2011. "How do very open economies adjust to large immigration flows? Evidence from Spanish regions," Labour Economics, Elsevier, Elsevier, vol. 18(1), pages 57-70, January.
  6. Antonio Accetturo & Matteo Bugamelli & Andrea Lamorgese, 2012. "Welcome to the machine: firms' reaction to low-skilled immigration," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 846, Bank of Italy, Economic Research and International Relations Area.
  7. Libertad González Luna & Francesc Ortega, 2007. "How do very open economies adjust to large immigration flows? Recent evidence from Spanish regions," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1059, Department of Economics and Business, Universitat Pompeu Fabra.

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