Location of Repository

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

By Alison L. Booth and Pamela Katic

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.monopsony, imperfect competition, separation, labour supply elasticity

OAI identifier:

Suggested articles

Preview

Citations

  1. (1984). An Equilibrium Model of Search Unemployment.
  2. (1999). Minimum Wages for Ronald McDonald Monopsonies:
  3. (2009). Monopsonistic Discrimination, Worker Turnover, and the Gender Wage Gap’.
  4. (2003). Monopsony in Motion: Imperfect Competition in Labor Markets.
  5. (2002). Oligopsony and Monopsonistic Competition in Labor Markets',
  6. (2005). Sex Differences in Pay in a 'New Monopsony' Model of the Labor Market’.
  7. Testing Some Predictions of Human Capital Theory: New Training Evidence from
  8. (2007). The HILDA Survey and its Contribution to Economic and Social Research (So Far)’.
  9. (1998). Wage Differentials, Employer Size,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.