Testing for Keynesian Labor Demand

NBER Working Paper No. 18149

Issued in June 2012

NBER Program(s):Economic Fluctuations and Growth, Monetary Economics



According to the textbook Keynesian model, short-run demand for labor is sensitive to the demand for goods. In this view, sellers deviate from setting the marginal product of labor proportional to the real wage, instead enduring or choosing lower price markups when demand for goods is high. We test this prediction across U.S. industries in the two decades up through the Great Recession. To identify movements in goods demand, we exploit how durability varies across 70 categories of consumption and investment. We also take into account the flexibility of prices and capital-intensity of production across goods. We find evidence in support of Keynesian Labor Demand.

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Document Object Identifier (DOI): 10.3386/w18149

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