Testing for Keynesian Labor Demand

Mark Bils, Peter J. Klenow, Benjamin A. Malin

NBER Working Paper No. 18149
Issued in June 2012
NBER Program(s):   EFG   ME

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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An online appendix is available for this publication.

Acknowledgments

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