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

Allan Drazen (), Daniel Hamermesh and Norman P. Obst

No 676, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1981-05
Note: LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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.

Downloads: (external link)
http://www.nber.org/papers/w0676.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:0676

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0676

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().