An Industry-Equilibrium Analysis of the LeChatelier Principle
By considering firms operating in a perfectly- or monopolisticallycompetitive industry with free entry, we show that well-established results on the celebrated LeChatelier principle (LCP) do not extend into an endogenous competitive environment. For instance, labour demand may be more elastic in the short run (where capital is fixed) than in the long run even if capital and labour are either complements or substitutes in profits. This may also be true locally at a point of long-run equilibrium. A novel insight is that industry-equilibrium effects introduce an asymmetry such that the LCP may hold for wage increases but not for wage decreases. These results are important for the interpretation of estimated labour-demand elasticities. Finally, we show that the LCP may hold for the total industry labour demand in situations where it does not hold for the labour demand of individual firms.
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