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Elasticity of Supply to the Firm and the Business Cycle

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  • Depew, Briggs

    ()
    (Louisiana State University)

  • Sorensen, Todd A.

    ()
    (University of Nevada, Reno)

Abstract

A 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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5928.

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Length: 42 pages
Date of creation: Aug 2011
Date of revision:
Publication status: forthcoming in: Labour Economics
Handle: RePEc:iza:izadps:dp5928

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Keywords: monopsony; business cycles; labor market frictions;

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  1. Christopher L. Foote & Warren C. Whatley & Gavin Wright, 2001. "Arbitraging a Discriminatory Labor Market: Black Workers at the Ford Motor Company, 1918-1947," Working Papers, Stanford University, Department of Economics 01009, Stanford University, Department of Economics.
  2. Douglas O. Staiger & Joanne Spetz & Ciaran S. Phibbs, 2010. "Is There Monopsony in the Labor Market? Evidence from a Natural Experiment," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 28(2), pages 211-236, 04.
  3. Torberg Falch, 2008. "The elasticity of labor supply at the establishment level," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 1106, Princeton University, Department of Economics, Industrial Relations Section..
  4. Ransom, Michael R, 1993. "Seniority and Monopsony in the Academic Labor Market," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 221-33, March.
  5. Dube, Arindrajit & Lester, T. William & Reich, Michael, 2011. "Do Frictions Matter in the Labor Market? Accessions, Separations, and Minimum Wage Effects," Institute for Research on Labor and Employment, Working Paper Series, Institute of Industrial Relations, UC Berkeley qt4t3342nd, Institute of Industrial Relations, UC Berkeley.
  6. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(3), pages 1215-1264, September.
  7. Boris Hirsch, 2007. "Joan Robinson Meets Harold Hotelling: A Dyopsonistic Explanation of the Gender Pay Gap," Working Papers, Bavarian Graduate Program in Economics (BGPE) 024, Bavarian Graduate Program in Economics (BGPE).
  8. Julie L. Hotchkiss & Myriam Quispe-Agnoli, 2009. "Employer monopsony power in the labor market for undocumented workers," Working Paper, Federal Reserve Bank of Atlanta 2009-14, Federal Reserve Bank of Atlanta.
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Cited by:
  1. Webber, Douglas A., 2013. "Firm Market Power and the Earnings Distribution," IZA Discussion Papers 7342, Institute for the Study of Labor (IZA).
  2. Webber, Douglas A., 2013. "Firm-Level Monopsony and the Gender Pay Gap," IZA Discussion Papers 7343, Institute for the Study of Labor (IZA).
  3. Depew, Briggs & Norlander, Peter & Sorensen, Todd A., 2013. "Flight of the H-1B: Inter-Firm Mobility and Return Migration Patterns for Skilled Guest Workers," IZA Discussion Papers 7456, Institute for the Study of Labor (IZA).
  4. Torberg Falch, 2013. "Wages and Recruitment: Evidence from External Wage Changes," CESifo Working Paper Series 4078, CESifo Group Munich.

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