How Elastic is The Demand for Labor? / Kim B. Clark, Richard B. Freeman.

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Clark, Kim B

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0309.Publication details: Cambridge, Mass. National Bureau of Economic Research 1979.Description: 1 online resource: illustrations (black and white)Online resources:

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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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Previous	nber w0306 Efficient Wage Bargains Under Uncertain Supply and Demand /	nber w0307 Restriction of International Production: The Effects on the Domestic Economy /	nber w0308 Income and Race Differences in Children's Health /	nber w0309 How Elastic is The Demand for Labor? /	nber w0310 Domestic Savings and International Capital Flows /	nber w0311 Monetary Policy Under Exchange Rate Flexibility /	nber w0312 Inflation and the Taxation of Capital Income in the Corporate Sector /	Next

1979.

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.