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 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 do this, following the modelling strategy of Manning (2003), and
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 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.