Elasticity Of Supply To The Firm And The Business Cycle
Source: Institute for the Study of Labor
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. The authors 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, they are able to estimate the elasticity of supply to the firm during several recessions and expansions. Their analysis suggests that the elasticity is indeed lower during recessions, consistent with the comparative statistics from the Burdett-Mortensen search model.