June 1, 2005
Four studies examined how demand-side considerations and imperfect competition affect labour market outcomes.
Study (1) finds that the reported hours constraints of male manual workers in the British Household Panel Survey reflect differences in the way their working hours are determined. I control for selection by an extension of the Heckman two-step method to ordered selection and random effects. Estimates of labour supply elasticity are biased if constraints are ignored. Local labour market conditions affect the hours of constrained but not of unconstrained workers.
Study (2), using the 1998 Workplace Employee Relations Survey, finds that firm-level differences in technology, differences in individual worker characteristics and the sorting of workers to firms all help explain hours. Sorting on human capital characteristics appears stronger than sorting on workers’ preferences. Within firms, workers’ preference characteristics significantly affect hours of work. The results are consistent with a labour market where both workers and firms have preferences over hours, but competition is only imperfect.
Study (3) examines paid holiday entitlements in the UK. A model predicts that imperfect labour market competition affects annual work weeks (weeks of holiday) and earnings, but not weekly work hours. Data from the Labour Force Survey reveal a weak trade-off between weekly work hours and annual work weeks. Weekly work hours were positively associated with total earnings, but annual work weeks (weeks of holiday) were negatively (positively) related to total earnings. These opposing effects contradict the competitive theory of compensating differentials, but support the model presented.
Study (4), using the BHPS and difference-in-difference techniques, finds no evidence that the introduction of the National Minimum Wage reduced the training of affected workers, and some evidence that it increased it. The findings are consistent with labour markets being imperfectly competitive.