Estimating Labour Market Power: The Long and Short Of It

The labour supply curve to an employer is likely dynamic. The paper presented in this Mannheim Applied Seminar shows that estimates of monopsony power based on a static model or using an event study approach are generally biased. The authors show how to estimate a dynamic labour supply curve avoiding this problem. Using UK matched employer-employee data, they estimate a short-run labour supply elasticity of 1–2 and a long-run elasticity of 5–6. Separations and hiring elasticities estimated on the same data are consistent with the long-run elasticity, as their model predicts.