Estimating the elasticity of labor supply to a firm: results from a field experiment

ABSTRACT

‘New Monopsony’ models imply that firms can possess wage-setting power even in competitive markets so long as they face an upward-sloping labour supply curve due to labour market frictions. However, previous research has yielded wildly different estimates of the elasticity of labour supply to a firm. Using a field experiment where identical job offers were posted with varying wages in statistically matched areas, I estimate that the elasticity of labour supply to a restaurant to be quite high, between 11.6 and 20.9, implying that workers are hired at wages between 92% and 95% of their marginal products. These results provide evidence for a model where firms only possess wage-setting power over incumbent employees, while new employees are hired at wages close to their marginal products. The policy implications of such a model are discussed.

KEYWORDS:

• Monopsony
• labour market
• wage-setting

JEL CLASSIFICATION:

• J00
• J22
• J42

Disclosure statement

No potential conflict of interest was reported by the author(s).