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Quantity and Elasticity Spillovers onto the Labor Market: Theory and Evidence on Sluggishness

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  • Allan Drazen
  • Daniel S. Hamermesh
  • Norman P. Obst

Abstract

Firms' beliefs that they may be unable to sell as much as they would like at the market price leads not only to a quantity spillover (even when prices are flexible) but also to a spillover of product demand elasticity onto the elasticity of labor demand. Hence, optimal firm behavior can be expected to produce a negative correlation between the (absolute value of) the wage elasticity and the unemployment rate. This hypothesis is tested on three sets of data. 1) For low-skilled workers in the United States in 1969 there is weak support for this hypothesis; 2) In time-series data for the U.S. there is no evidence for the hypothesis (there is essentially no cyclical variability in the elasticity); and 3) In time-series data for the United Kingdom there is fairly strong evidence supporting it. We also find that, in both the U.S. and the U.K., the demand elasticity for labor decreased in the 1970s to an extent that does not appear to be explained by changes in other factor prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0676.

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Date of creation: May 1981
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Publication status: published as Drazen, Allan, Daniel S. Hamermesh, and Norman P. Obst. "The Variable Employment Elasticity Hypothesis: Theory and Evidence." Research in Labor Economics, Vol. 6 , (1984), pp. 287-309.
Handle: RePEc:nbr:nberwo:0676

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  1. John M. Abowd & Orley C. Ashenfelter, 1981. "Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials," NBER Chapters, in: Studies in Labor Markets, pages 141-186 National Bureau of Economic Research, Inc.
  2. Yeung, Patrick, 1972. "A Note on the Rules of Derived Demand," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 511-17, August.
  3. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March.
  4. Tinsley, P A, 1971. "A Variable Adjustment Model of Labor Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(3), pages 482-510, October.
  5. Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
  6. Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-34, May.
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Cited by:
  1. Henri-Paul Rousseau & Francis Taurand, 1984. "Financement de la securite du revenu et taxes sur la masse salariale," Canadian Public Policy, University of Toronto Press, vol. 10(4), pages 459-467, December.

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