Download this Paper Open PDF in Browser

How Do Industries and Firms Respond to Changes in Local Labor Supply?

44 Pages Posted: 8 Jan 2012  

Christian Dustmann

University College London; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Albrecht Glitz

Universitat Pompeu Fabra; IZA Institute of Labor Economics

Abstract

In this paper, we investigate how changes in the skill mix of local labor supply are absorbed by the economy. We distinguish between three adjustment mechanisms: through factor prices, through an expansion in the size of those production units that use the more abundant skill group more intensively, and through more intensive use of the more abundant skill group within production units. We investigate which of these channels is dominant. We contribute to the existing literature by analyzing these adjustments on the level of firms, rather than industries, and by assessing the role of new firms in the absorption process of labor supply shocks. Our analysis is based on administrative data, comprising the entirety of firms in Germany over a 10 years period. We find that, while factor price adjustments are important in the non-tradable sector, labor supply shocks do not induce factor price changes in the tradable sector. In this sector, most of the adjustment to changes in relative factor supplies takes place within firms by changing relative factor intensities. Given the non-response of factor prices, this finding points towards changes in production technology. Our results further show, that firms that enter and exit the market are an important additional channel of adjustment. Finally, we demonstrate that an industry level analysis is likely to over-emphasize technology-based adjustments.

Keywords: immigration, endogenous technological change, firm structure

JEL Classification: F1, J2, J61, L2, O3

Suggested Citation

Dustmann, Christian and Glitz, Albrecht, How Do Industries and Firms Respond to Changes in Local Labor Supply?. IZA Discussion Paper No. 6257. Available at SSRN: https://ssrn.com/abstract=1981213

Christian Dustmann (Contact Author)

University College London ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 20 7679 5832 (Phone)
+44 20 7916 2775 (Fax)

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Albrecht Glitz

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

IZA Institute of Labor Economics

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

Paper statistics

Downloads
100
Rank
224,458
Abstract Views
617