Finite Wage Elasticity of Labor Supply to the Firm: Macroeconomic Evidence and Implications

Abstract

Joan Robinson first suggested that the labor supply curve for a firm may be upward sloping with a finite wage elasticity. Recently, a rapidly growing volume of microeconomics studies have found empirical support for Robinson’s suggestion. This paper develops two macroeconomic implications. First, owners of non-labor resources receive rents above their contribution to production. Thus, estimates of non-labor productivity that utilize market returns have a bias. Second, deceased wage elasticity of labor supply for firms may amplify and/or cause recessions. Implementing policies to reverse a decreased elasticity may be an appropriate response to a recession. Empirical evidence from recessions is found to be consistent with finite pro-cyclical wage elasticity.