Heterogeneous producers in an extractive industry

Abstract

Heterogeneity of natural conditions is an important phenomenon in many extractive industries. We study the effects of natural conditions as measured by the width of the coal seam on the short-run demand for labor for underground mines in Eastern Kentucky. Natural conditions have an important influence on labor demand in two ways: the employment of the mine, given it operates, and the probability of the mine being open. We find that marginal mines on thinner seams are more likely to open and close periodically in response to changes in market conditions. The Heckman sample selection correction method is used to correct the labor demand equation for the bias induced by the endogenous open-close behavior. The estimated price and wage elasticities are larger in absolute value once the opening and closing of mines is taken into account. Thus, forecasts of changes in labor demand due to changes in market conditions will understate the acutal changes if they are based on samples of open mines or fail to incorporate mines' opening and closing behavior.