Elasticity of Supply to the Firm and the Business Cycle
AbstractA body of recent empirical work has found strong evidence that the labor elasticity of supply to the firm is finite, implying that firms may have wage setting power. However, these studies capture only snapshots of the parameter. We study this parameter over a period that provides substantial variation in the business cycle. Using a rich employee level dataset from the inter-war period, we are able to estimate the elasticity of supply to the firm during several recessions and expansions. Our analysis suggests that the elasticity is indeed lower during recessions, consistent with the comparative statics from the Burdett-Mortensen search model. This differential wage setting power over the business cycle provides an alternative explanation of the pro-cyclicality of wages.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5928.
Length: 42 pages
Date of creation: Aug 2011
Date of revision:
Publication status: forthcoming in: Labour Economics
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Find related papers by JEL classification:
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-BEC-2011-09-05 (Business Economics)
- NEP-LAB-2011-09-05 (Labour Economics)
- NEP-LMA-2011-09-05 (Labor Markets - Supply, Demand, & Wages)
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