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Labor Market Competition and Employment Adjustment over the Business Cycle


  • Douglas A. Webber


Using linked employer–employee data that covers the majority of U.S. employment, I examine how frictions in the labor market have evolved over time. I estimate that the labor supply elasticity to the firm declined significantly (1.20–1.01) since the late 1990s, with the steepest declines occurring during the financial crisis. I find that this decline in labor market competition led to at least a 4 percent drop in earnings for the average worker. I also find evidence that relatively monopsonistic firms smooth their employment behavior, growing at a rate lower than relatively competitive firms in good economic climates and slightly higher during poor economic climates. This conforms with the predictions of recent macroeconomic search models that suggest frictions in the economy may actually reduce employment fluctuations due to adjustment costs associated with hiring and laying off workers.

Suggested Citation

  • Douglas A. Webber, 2022. "Labor Market Competition and Employment Adjustment over the Business Cycle," Journal of Human Resources, University of Wisconsin Press, vol. 57(S), pages 87-110.
  • Handle: RePEc:uwp:jhriss:v:57:y:2022:i:s:p:s87-s110
    Note: DOI: 10.3368/jhr.monopsony.0119-9954R1

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    Cited by:

    1. Bassier, Ihsaan, 2023. "Firms and inequality when unemployment is high," Journal of Development Economics, Elsevier, vol. 161(C).
    2. David Autor & Arindrajit Dube & Annie McGrew, 2023. "The Unexpected Compression: Competition at Work in the Low Wage Labor Market," NBER Working Papers 31010, National Bureau of Economic Research, Inc.
    3. Christian Bredemeier & Babette Jansen & Roland Winkler, 2023. "Labor Market Power and the Effects of Fiscal Policy," Jena Economics Research Papers 2023-015, Friedrich-Schiller-University Jena.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs


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