An Industry-Equilibrium Analysis of the LeChatelier Principle

Peter Arendorf Bache () and Anders Laugesen ()
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Peter Arendorf Bache: Department of Economics and Business, Aarhus University, Postal: 8210 Aarhus V, Denmark
Anders Laugesen: Department of Economics and Business, Aarhus University, Postal: 8210 Aarhus V, Denmark

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: 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.

Keywords: Complements; Substitutes; Monopolistic Competition; Industry Equilibrium; Labour Demand; LeChatelier Principle (search for similar items in EconPapers)
JEL-codes: C61 D21 J23 (search for similar items in EconPapers)
Pages: 19
Date: 2013-09-04
New Economics Papers: this item is included in nep-mic
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