Estimating the Wage Elasticity of Labour Supply to a Firm: Is there Monopsony Down-under?

Alison Booth and Pamela Katic

No 626, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

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 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 do this, following the modelling strategy of Manning (2003), and 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 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 (search for similar items in EconPapers)
JEL-codes: J21 J42 J71 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-bec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Estimating the Wage Elasticity of Labour Supply to a Firm: What Evidence Is There for Monopsony? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:auu:dpaper:626

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