A REJOINDER ON ALTERNATIVE MEASURES OF EXCESS DEMAND

W.S. Reece (5) has commented on our recent study in this Journal (2) in which we attempted to compare a more comprehensive measure of excess demand for labour in the UK manufacturing sector and then applied the resulting series to help explain money wage inflation. Whilst agreeing with our argument for using excess demand for labour services in preference to the level of unemployment, Reece is unhappy with our estimates of the respective labour and hours demand functions and is also critical of our second stage procedure of deriving excess demand indices from the computed functions. We recognise the validity of Reece's objection to our method of obtaining the excess demand series and indeed, we conceded the difficulty of our approach in the original study (2, pp. 33–35). However, we do not consider that his criticism of our estimation of the labour and hours demand functions is correct, or that our subsequent application of this result need invalidate the original derivation of the input demands. Although we welcome new research which will permit superior methods for separately estimating demand and supply functions for markets in disequilibrium, we believe there remain some significant difficulties with the methods which Reece cites (3 and 4) as providing the basis for his ‘superior’ approach.