Firm-Specific Wage Elasticity and the Return to Capital

Joan Robinson first suggested that the labor supply curve for a firm may be upward sloping with a finite wage elasticity. Recently, a rapidly growing volume of microeconomics studies have found empirical support for Robinson’s suggestion. In this paper it is shown that if a firm’s wage elasticity of supply for labor is finite, then owners of non-labor resources receive rents above their contribution to production. Thus, estimates of non-labor productivity that utilize market returns have a bias. A firm with a low wage elasticity may even have a negative marginal product for non-labor resources.