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

Christian Dustmann and Albrecht Glitz ()

No 6257, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 (search for similar items in EconPapers)
JEL-codes: F1 J2 J61 L2 O3 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-12
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 (16)

Published - published in: Journal of Labor Economics, 2015, 33 (3) part 1, 711-750

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Related works:
Journal Article: How Do Industries and Firms Respond to Changes in Local Labor Supply? (2015)
Working Paper: How Do Industries and Firms Respond to Changes in Local Labor Supply? (2012)
Working Paper: How Do Industries and Firms Respond to Changes in Local Labor Supply? (2011)
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