Elasticity of Supply to the Firm and the Business Cycle

42 Pages Posted: 4 Sep 2011

See all articles by Briggs Depew

Briggs Depew

University of Arizona - Department of Economics

Todd Sorensen

University of Arizona - Department of Economics

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.

Keywords: business cycles, labor market frictions, monopsony

JEL Classification: J42, J31, J64

Suggested Citation

Depew, Briggs and Sorensen, Todd, Elasticity of Supply to the Firm and the Business Cycle. Available at SSRN: https://ssrn.com/abstract=1921979 or http://dx.doi.org/10.2139/ssrn.1921979

Briggs Depew (Contact Author)

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

Todd Sorensen

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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