Preston Mui, UC Berkeley Graduate Student, UCB Economics
Abstract: I assess the role of labor market monopsony---finite-elasticity firm-specific labor supply curves---in the context of a New Keynesian model. Existing models have used this feature as a source of real rigidity, permitting the models to feature flatter Phillips Curves, and thus smaller changes in inflation in response to demand shocks. First, I show that calibrating the elasticity of firm-specific labor supply to micro-empirical estimates reduces the slope of the Phillips Curve by a factor of 2 relative to the perfectly competitive labor market benchmark--consistent with this mechanism serving as a source of real rigidity. Second, I provide an empirical test for this mechanism, drawing on cross-sectional industry variation in the firm-specific labor supply elasticity. Using data from the Survey of Income and Program Participation, I estimate firm-specific labor supply elasticities by industry using a dynamic monopsony model. I then compare empirical industry responses to monetary policy shocks to model predictions from a multi-sector model with heterogeneous labor supply elasticities. Consistent with this augmented New Keynesian model, high-elasticity industries experience more negative price changes in response to monetary policy shocks. However, I find no difference in the response of output, employment, or wages, inconsistent with the predictions of a New Keynesian model with this source of real rigidity.