Estimating the Wage Elasticity of Labour Supplyto a Firm: What Evidence Is There for Monopsony?

In this paper we estimate the elasticity of the labour supply to a firm, using data from theHousehold, Income and Labour Dynamics in Australia (HILDA) Survey. Estimation of thiselasticity is of particular interest not only in its own right but also because of its relevance tothe debate about the competitiveness of labour markets. The essence of monopsonisticallycompetitive labour markets is that labour supply to a firm is imperfectly elastic with respect tothe wage rate. The intuition is that, where workers have heterogeneous preferences or facemobility costs, firms can offer lower wages without immediately losing their workforce. This isin contrast to the perfectly competitive extreme, in which the elasticity is infinite. Therefore asimple test of whether labour markets are perfectly or imperfectly competitive involvesestimating the elasticity of the labour supply to a firm. We find that the Australian wageelasticity of labour supply to a firm is around 0.71, only slightly smaller than the figure of 0.75reported by Manning (2003) for the UK. These estimates are so far from the perfectlycompetitive assumption of an infinite elasticity that it would be difficult to make a case thatlabour markets are perfectly competitive....