Regional Variations in Labor Demand Elasticities: Evidence from U.S. Counties

We use a large panel dataset covering the years 1988 to 2010 to estimate county specific total wage elasticities of labor demand for four highly aggregated industries in the United States. Our industries are construction, finance/real estate/service, manufacturing, and retail trade, which together employ on average over eighty percent of the U.S. national labor force per year. We use both the conventional constant coefficient panel data model and a random coefficients panel data model to estimate labor demand elasticities in various industries. We find the labor demand curves in all the industries studied to be downward sloping. We also find significant evidence that the total wage elasticity of labor demand exhibits regional variation. The labor demand estimates obtained in this study are useful to investigate the differential impact of various shocks and policy changes on the labor market. As an example, we use the estimated county specific labor demand elasticities to identify the impact of union membership and right to work laws on labor demand. We show that labor demand tends to become less elastic with higher union membership rates. We also find that labor demand becomes more elastic if a right to work law is in place.