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How Elastic is The Demand for Labor?

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  • Kim B. Clark
  • Richard B. Freeman

Abstract

This paper investigates the magnitude of the elasticity of demand for labor in time series data using more general and complete models of demand than have been previously employed. It argues that previous analyses have imposed two invalid constraints in calculations, which bias downward estimated elasticities. The first invalid constraint is the assumption that real capital prices have an equal opposite effect to real wages in the demand equation. We show on measurement error grounds that this constraint should not be imposed in econometric work even when long run homogeneity of prices correctly characterizes the market. The constraint is rejected in the data. The second invalid constraint is that all explanatory variables have the same lag distribution. We argue that this constraint is invalid when decisions are made under uncertainty and find that it is also rejected by the data. The principal positive empirical finding is that with the constraints relaxed, the elasticity, of demand with respect to real wages is much larger than the estimates in the literature, indicating much greater price responsiveness on the demand side of the labor market than has previously been thought.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0309.

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Date of creation: Jan 1979
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Publication status: published as Clark, Kim B. and Freeman, Richard B. "How Elastic is the Demand for Labor?" The Review of Economics and Statistics, Vol. LXII, No. 4, (November 1980) , pp. 509-520.
Handle: RePEc:nbr:nberwo:0309

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  1. Marc Nerlove, 1967. "Distributed Lags and Unobserved Components in Economic Time Series," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 221, Cowles Foundation for Research in Economics, Yale University.
  2. M. Ishaq Nadiri & Sherwin Rosen, 1973. "A Disequilibrium Model of Demand for Factors of Production," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number nadi73-1.
  3. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, National Bureau of Economic Research, Inc, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  4. Binswanger, Hans P., 1973. "A Cost Function Approach To The Measurement Of Factor Demand Elasticities And Elasticities Of Substitution," Staff Papers, University of Minnesota, Department of Applied Economics 13478, University of Minnesota, Department of Applied Economics.
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Cited by:
  1. Jacques Mairesse & Brigitte Dormont, 1985. "Labor and Investment Demand at the Firm Level: A Comparison of French, German and U.S. Manufacturing, 1970-79," NBER Working Papers 1554, National Bureau of Economic Research, Inc.
  2. Michael T. Shannon & Charles M. Beach, 1995. "Distributional Employment Effects of Ontario Minimum-Wage Proposals: A Microdata Approach," Canadian Public Policy, University of Toronto Press, University of Toronto Press, vol. 21(3), pages 284-303, September.
  3. Hijzen, Alexander & Swaim, Paul, 2010. "Offshoring, labour market institutions and the elasticity of labour demand," European Economic Review, Elsevier, Elsevier, vol. 54(8), pages 1016-1034, November.
  4. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, Elsevier, vol. 54(1), pages 27-56, June.
  5. Richard B. Freeman, 1979. "The Effect of Demographic Factors on Age-Earnings Profiles," NBER Working Papers 0316, National Bureau of Economic Research, Inc.
  6. Brigitte Dormont, 1989. "Petite apologie des données de panel," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 87(1), pages 19-32.
  7. Matthew J. Slaughter, 1997. "International Trade and Labor-Demand Elasticities," NBER Working Papers 6262, National Bureau of Economic Research, Inc.
  8. Silvio Rendon & Giovanna Aguilar, 2007. "Employment and Deadweight Loss Effects of Observed Non-Wage Labor Costs," Working Papers, Centro de Investigacion Economica, ITAM 0704, Centro de Investigacion Economica, ITAM.
  9. Cousineau, Jean-Michel, 1991. "L’effet du salaire minimum sur le chômage des jeunes et des femmes au Québec : une réestimation et un réexamen de la question," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 67(2), pages 144-165, juin.
  10. Daniel S. Hamermesh, 1983. "New Measures of Labor Cost: Implications for Demand Elasticities and Nominal Wage Growth," NBER Chapters, National Bureau of Economic Research, Inc, in: The Measurement of Labor Cost, pages 287-308 National Bureau of Economic Research, Inc.
  11. Michael Kremer & Benjamin A. Olken, 2009. "A Biological Model of Unions," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 1(2), pages 150-75, April.
  12. repec:fth:prinin:279 is not listed on IDEAS
  13. Daniel Rich, 2010. "Changing Elasticities of Labor Demand in U.S. Manufacturing," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 38(2), pages 157-168, June.

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