Quantity and Elasticity Spillovers onto the Labor Market: Theory and Evidence on Sluggishness
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.
|Date of creation:||May 1981|
|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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- John M. Abowd & Orley C. Ashenfelter, 1981.
"Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials,"
in: Studies in Labor Markets, pages 141-170
National Bureau of Economic Research, Inc.
- John M. Abowd & Orley Ashenfelter, 1980. "Anticipated Unemployment, Temporary Layoffs and Compensating Wage Differentials," Working Papers 517, Princeton University, Department of Economics, Industrial Relations Section..
- Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-634, May.
- repec:uwp:jhriss:v:10:y:1975:i:1:p:3-24 is not listed on IDEAS
- Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March.
- Solow, Robert M, 1980. "On Theories of Unemployment," American Economic Review, American Economic Association, vol. 70(1), pages 1-11, March.
- Patrick Yeung, 1972. "A Note on the Rules of Derived Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 86(3), pages 511-517.
- 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.
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