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.

Dual-Track and Mandatory Quota in China's Price Reform*

China's price reform has been progressing through the mandatory quota (MQ) and dual-track schemes; a unique characteristic of China's gradualist approach to economic transition. The purpose of this paper is to show how MQ, properly modified, has been a bridge from a planned to a market-oriented price system. We analyze six criteria: industry output, average price, excluded buyers, buyers' surplus, producers' surplus and deadweight loss (not necessarily all independent) in our welfare comparison of a competitive market, monopoly and MQ form of market structure. A more general analytic formulation of our model and a graphic representation of the process are shown in the Appendix.