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Estimating the Wage Elasticity of Labour Supply to a Firm: What Evidence Is There for Monopsony?

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  • Booth, Alison L.

    ()
    (Australian National University)

  • Katic, Pamela

    ()
    (Australian National University)

Abstract

In 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 not only in its own right but also 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 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 by Manning (2003) 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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5167.

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Length: 26 pages
Date of creation: Sep 2010
Date of revision:
Publication status: published in: Economic Record, 2011, 87 (278), 359 - 369
Handle: RePEc:iza:izadps:dp5167

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Keywords: labour supply elasticity; monopsony; imperfect competition; separation;

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References

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  1. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
  2. Ransom, Michael R. & Oaxaca, Ronald L., 2005. "Sex Differences in Pay in a "New Monopsony" Model of the Labor Market," IZA Discussion Papers 1870, Institute for the Study of Labor (IZA).
  3. Albrecht, James W & Axell, Bo, 1983. "An Equilibrium Model of Search Unemployment," Working Paper Series 99, Research Institute of Industrial Economics.
  4. Boris Hirsch & Thorsten Schank & Claus Schnabel, 2010. "Differences in Labor Supply to Monopsonistic Firms and the Gender Pay Gap: An Empirical Analysis Using Linked Employer-Employee Data from Germany," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 291-330, 04.
  5. Barth, Erling & Dale-Olsen, Harald, 2009. "Monopsonistic Discrimination, Worker Turnover, and the Gender Wage Gap," IZA Discussion Papers 3930, Institute for the Study of Labor (IZA).
  6. Bhaskar, V & To, Ted, 1999. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Economic Journal, Royal Economic Society, vol. 109(455), pages 190-203, April.
  7. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  8. Mark Wooden & Nicole Watson, 2007. "The HILDA Survey and its Contribution to Economic and Social Research (So Far)," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 208-231, 06.
  9. Alison L. Booth & Mark L. Bryan, 2005. "Testing Some Predictions of Human Capital Theory: New Training Evidence from Britain," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 391-394, May.
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Cited by:
  1. Sabien Dobbelaere & Kozo Kiyota & Jacques Mairesse, 2013. "Product and Labor Market Imperfections and Scale Economies: Micro-Evidence on France, Japan and the Netherlands," Tinbergen Institute Discussion Papers 13-037/VII, Tinbergen Institute.
  2. repec:dgr:uvatin:2013037 is not listed on IDEAS
  3. Manning, Alan, 2011. "Imperfect Competition in the Labor Market," Handbook of Labor Economics, Elsevier.

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