Labor Market Competition and Employment Adjustment Over the Business Cycle

Abstract

Using linked employer-employee data which covers the majority of U.S. employment, I examine how frictions in the labor market have evolved over time. I estimate that the labor supply elasticity to the firm declined significantly (1.20 to 1.01) since the late 1990’s, with the steepest declines occurring during the financial crisis. I find that this decline in labor market competition led to at least a 4 percent drop in earnings for the average worker.

I also find evidence that relatively monopsonistie firms smooth their employment behavior, growing at a rate lower than relatively competitive firms in good economic elimatos and slightly higher during poor economic climates. This conforms with the predictions of recent macroeconomic search models which suggest that frictions in the economy may actually reduce employment fluctuations due to adjustment costs associated with hiring/laying off workers.