Demand shift across US industries and the stabilizing function of nominal wage and price flexibility

Nominal wage and price adjustments in response to demand shocks are likely to determine industrial output variability. The direction of this relations hip is complicated, however, by demand and supply factors. The empirical in vestigation across a sample of private industries in the United States prod uces the following evidence. Price flexibility moderates the response of th e output supplied to a given shift in industrial demand. Similarly, nominal wage flexibility moderates, although insignificantly, the output response to a given shift in industrial demand. The size of industrial demand shifts dominates, however, supply-side constraints in differentiating output fluc tuations across industries. While price flexibility moderates shifts in ind ustrial demand in response to aggregate demand shocks, these shifts are lar ger the higher the nominal wage flexibility across industries. The combined supply and demand effects differentiate the stabilizing function of nomina l wage and price flexibility. Nominal wage flexibility increases output flu ctuations in response to aggregate demand shocks. In contrast, output fluct uations are smaller the larger the price adjustment to demand shocks across industries. Given the endogeneity of price flexibility, it is necessary to control for variation in demand variability in order to reveal the stabili zing effect of price flexibility on output across industries.