The elasticity of labor supply to the firm over the business cycle

Abstract

Recent empirical work has found evidence that the elasticity of labor supply to individual firms is finite, implying that firms may have wage setting power. However, these studies capture only snapshots of the elasticity. We are the first to study how it changes between economic contractions and economic expansions. To do this, we extend the current identification strategy by relaxing the assumption that a firm replaces all separations with recruits. We take our identification strategy to data by studying two manufacturing firms during the volatile interwar period. Our analysis suggests that the elasticity is lower during recessions than expansions, providing evidence of differential wage setting power over the business cycle. This differential wage setting ability renders an alternative explanation of the pro-cyclicality of real wages and provides a deeper insight into the phenomenon of jobless recoveries.Contact Briggs Depew at bdepew@email.arizona.edu and Todd Sorensen at todd.sorensen@ucr.edu. Feedback received at

Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior

“…If we were to include starting wages in the sample, this would lead to sharp discontinuities in employee tenure and other associated characteristics. 15 The final estimation sample consists of 6,691 scheduled raises. Wages and scheduled raises are summarized in Panel A of Table 1.…”

“…Because the sample is limited to employees who have both a scheduled raise and a prior merit raise, it consists of relatively low-wage earners with relatively high job tenure. 15 Since merit raises are given annually at the end of June and eligibility requires at least 90 days of tenure, this sample restriction excludes employees who were hired after April 1st of the year of each minimum wage increase. It also excludes about 15% of the remaining sample because despite being eligible, these employees did not receive the most recent merit raise.…”

Firm market power and the earnings distribution

“…Note that the following primarily relies on the model presented in Manning (2003), and incorporates a key insight from the recent working paper by Depew and Sorensen (2011) to derive the least restrictive formula for the labor supply elasticity facing the rm currently in the literature. We can recursively formulate the supply of labor to a rm with the following equation, where R(w) is the ow of recruits to a rm and s(w) is the separation rate.…”

Do firms’ wage-setting powers increase during recessions?

“…Three non-experimental studies measured firm wage-setting power over the business cycle, using data from the US and Germany [1], [2], [3]. One of the studies examines labor markets between World War I and World War II [1], while the other two employ more contemporary data.…”

“…Previous work of the author (together with Briggs Depew and Peter Norlander) contains a larger number of background references for the material presented here and has been used intensively in all major parts of this article [2], [3].…”