Occupational Hierarchy by Learning Costs and the Equal Elasticity of Labor Demand Puzzle

Gregory Kurtzon


Empirical studies that show an elastic labor demand from supply shocks such as immigration and an inelastic labor demand from wage shocks such as changes in the minimum wage contradict the typical model?s prediction of an equal elasticity. This paper explains this apparent contradiction by generalizing the typical model of complementarity between skill groups and endogenizes that complementarity. Agents choose among complementary occupations on a hierarchy of heterogeneous learning costs. The new choices of low skilled workers to higher cost/wage occupations offset the effects of low skilled supply and wage shocks, making the effects more and less elastic respectively.