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