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

31 Pages Posted: 18 Aug 2004

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Daniel S. Hamermesh

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Norman Obst

Michigan State University

Date Written: May 1981

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.

Suggested Citation

Drazen, Allan and Hamermesh, Daniel S. and Obst, Norman P., Quantity and Elasticity Spillovers Onto the Labor Market: Theory and Evidence on Sluggishness (May 1981). NBER Working Paper No. w0676. Available at SSRN: https://ssrn.com/abstract=349082

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel S. Hamermesh

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States
512-475-8526 (Phone)
512-471-3510 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Norman P. Obst

Michigan State University ( email )

Department of Economics
East Lansing, MI 48824
United States

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