Elasticity of Supply to the Firm and the Business Cycle

Briggs Depew and Todd Sorensen

No 5928, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: labor market frictions; business cycles; monopsony (search for similar items in EconPapers)
JEL-codes: J31 J42 J64 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011-08
New Economics Papers: this item is included in nep-bec, nep-lab and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published - published as 'The elasticity of labor supply to the firm over the business cycle' in: Labour Economics, 2013, 24, 196-204

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