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

26 Pages Posted: 13 Sep 2010

See all articles by Alison L. Booth

Alison L. Booth

Australian National University (ANU) - Research School of Social Sciences (RSSS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Pamela Katic

Australian National University (ANU)

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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.

Keywords: monopsony, imperfect competition, separation, labour supply elasticity

JEL Classification: J42, J21, J71

Suggested Citation

Booth, Alison L. and Katic, Pamela, Estimating the Wage Elasticity of Labour Supply to a Firm: What Evidence is There for Monopsony?. IZA Discussion Paper No. 5167, Available at SSRN: https://ssrn.com/abstract=1675638

Alison L. Booth (Contact Author)

Australian National University (ANU) - Research School of Social Sciences (RSSS) ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 3285 (Phone)
+61 2 6125 0182 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pamela Katic

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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