Offshoring, labour market institutions and the elasticity of labour demand

This paper analyses the evolution of the elasticity of labour demand and the possible role of offshoring therein using industry-level data for a large number of OECD countries. The first main finding is that the wage elasticity of labour demand has increased substantially since 1980, although some of this increase may reflect a trend increase in the speed of adjustment rather than an increase in the long-run wage elasticity. The evidence on the potential contribution of offshoring to raising labour demand elasticity is mixed. No association is found between increases in offshoring and demand elasticity during the second half of the 1990s, but there is a significant cross-sectional association between higher average offshoring intensity during this period and higher demand elasticity. We also find some evidence that strict employment protection legislation weakens the cross-sectional association between offshoring and higher labour demand elasticity, suggesting that the relationship between offshoring and the labour demand elasticity may depend on the national institutional environment.     

Policy reform and labour demand in branches of Sri Lankan manufacturing industry

Many policy reforms in developing countries aim to remove factor market distortions. Whether such reforms reduce unemployment depends partly on the substitution possibilities between labour and other factors of production. This paper examines labour demand in seven branches of Sri Lankan manufacturing industry, using data on 4-digit industrial categories over the 1990 to 1997 period. The Box–Cox transformation is used to allow for flexible, and data-dependent, elasticities. The elasticity of capital–labour substitution varies widely across the branches of industry and is usually variable rather than constant. The average, long-run own-wage elasticity of labour demand for the manufacturing sector is estimated as ?0.80, so factor price policy should have an important effect on labour demand in this setting.     

Modelling Aggregate Demand for Labour: A Critique of Lewis and MacDonald

In a recent contribution to this journal, Lewis and MacDonald (2002) argue that Australian literature on aggregate demand for labour is permeated with misunderstandings and, as a result, existing empirical work has been misinterpreted. The objective of the present note is to argue that the interpretation of existing empirical studies, to the extent that they are based on a CES production technology, is broadly correct. We demonstrate that Lewis and McDonald have no basis for estimating anything more than the partial elasticity of labour demand, holding output constant, because their single-equation estimation does not identify the elasticity of demand for output.     

Multinational companies, backward linkages, and labour demand elasticities

Abstract .  This paper investigates the link between nationality of ownership and wage elasticities of labour demand at the level of the plant. In particular, we examine whether labour demand in multinationals becomes less elastic with respect to the wage if the plant has backward linkages with the local economy. Our empirical evidence, based on a rich plant level dataset, shows that the extent of local linkages does indeed generally reduce the wage elasticity of labour demand. This result is economically important and holds for a number of different specifications.     

Exporting and labour demand: Micro‐level evidence from Germany

It is widely believed that globalization increases the extent of employment and wage responses to economic shocks. In this paper, we investigate the effect of firms’ exporting activities on the wage elasticity of labour demand. Using rich, administrative linked employer–employee panel data from Germany and destination‐specific industry‐level information on trade flows, we explicitly control for self‐selection into exporting and endogeneity concerns. Overall, we find that exporting has a significant positive effect on the (absolute value of the) unconditional wage elasticity of labour demand. In line with our hypothesis, we further show that the effect is particularly strong for those plants that export a significant share of their output to low‐ and medium‐income countries, hence face relatively more price‐elastic product demand.     

The role of labour demand elasticities in tax incidence analysis with heterogeneous labour

Whether labour bears full burden of household level income and consumption taxes ultimately depends on the degree of substitutability among different types of labour in production. We find more variation in incidence patterns across households with less than perfectly substitutable heterogeneous labour than with perfectly substitutable homogeneous labour in production. This finding is based on results obtained from homogeneous and heterogeneous labour general equilibrium tax models calibrated to decile level income and consumption distribution data of UK households for the year 1994. We use labour supply elasticities implied by the substitution elasticity in households' utility functions and derive labour demand elasticities from the substitution elasticity in the production function. First version received: March 1998/Final version received: April 1999     

A MACROECONOMIC PERSPECTIVE ON SKILL SHORTAGES AND THE SKILL PREMIUM IN NEW ZEALAND*

Qualification and occupation‐based measures of skilled labour are constructed to explain the skill premium – the wage of skilled labour relative to unskilled labour in New Zealand. The data exhibit a more rapid growth in the supply of skilled labour than the skill premium, and a very large increase in the real minimum wage over the period from 1986 to 2005. We estimate the rate of increase in the relative demand for skills and the elasticity of substitution. The data are consistent with skill shortages and a skill‐bias technical change. We examine the effects of the minimum wage, capital complementarity, and the exchange rate on the skill premium. We also test whether the demand for skills and the elasticity of substitution varied across industries and over time.     

Looking back, looking ahead: Biased technological change, substitution and the wage gap

The implications of ICT on wage inequality are studied by applying a CES production function with skilled and unskilled labour. Skill-biased technological change increases wage inequality. The result is reinforced in a two-sector general equilibrium model if the income elasticity of the demand for high-tech goods and the elasticity of substitution between final goods are larger than one.     

Reconsidering the Marginal Welfare Cost of Taxation*

A model with sticky wage rates and involuntary unemployment is used to compute the marginal cost of taxation, and these estimates are compared with those obtained from the conventional price-clearing equilibrium model. Important determinants of the marginal cost estimates are the response of sticky wages to a tax increase, the elasticity of demand for labour, and the unemployment gap. By contrast, the conventional model focuses on the elasticity of labour supply. The different models have different implications for efficient tax design. However, the new model generally agrees with the conventional model regarding significant efficiency costs of higher taxation.     

Labour Demand, Wage Mark-ups and Product Market Integration

Globalization makes it easier to relocate production and thus employment across countries. Therefore, it is often asserted that labour demand becomes more elastic, causing wage mark-ups to fall and thus erode the effective market power of trade unions. We explore this issue in a general equilibrium model where the elasticity of labour demand is endogenized and related to the facility by which production can be relocated across countries. Wages and employment increase unambiguously as a result of product market integration, but it is ambiguous whether wage mark-ups decrease or increase. A numerical illustration suggests that the elasticity effect – even when the wage mark-up falls – is of second order relative to the gains from trade.      

Joint Allocation of Leisure and Consumption Commodities: A Japanese Extended Consumer Demand System 1979—90

In this study we estimate the parameters of a household expenditure function which includes joint choice of leisure and consumption commodities in scope without a separability assumption. We have used Japanese prices, wage rate, labour supply, and expenditure data on ten commodity groups, collected from 47 cities over 12 years. This data set has the advantage that separate observations are available for each data point for all the variables. We employed the AI demand system, for estimation. Controlling for time-specific effects, the result implied a definite rejection of the weak separability of labour supply and commodity choice, and non-rejection of the homogeneity and symmetry restrictions on the demand system. All the own-price elasticities are significantly negative, and both substitutes and complements are observed across commodity groups. As for the negativity, all but one of the eigenvalues of the substitution matrix are negative. The result as a whole showed consistency with demand theory. The estimated compensated labour supply elasticity is 0.39, which is in reasonable agreement with the previous studies.     

Measuring income elasticity for Swiss money demand: What do the cantons say about financial innovation?

Recent time-series evidence has re-confirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy.     

That elusive elasticity and the ubiquitous bias: Is panel data a panacea?

There is often assumed to be a unit elasticity of substitution between capital and labour. But estimates based on neoclassical capital demand equations frequently find a smaller value. Recent time-series work for the United States and Canada has suggested that, once the biases inherent in estimating cointegrating vectors are properly accounted for, the elasticity could indeed be close to 1. We investigate this possibility for the United Kingdom. First we use aggregate data and find that the estimated elasticity is in the neighbourhood of 0.4. We then exploit a unique industry-level dataset for the United Kingdom to try and further pinpoint our estimates. Estimates using dynamic panel data methods are close to our benchmark estimate using aggregate data, providing a robust statistical rejection of a unit elasticity in UK data.     

Valuing water for Chinese industries: a marginal productivity analysis

A marginal productivity approach is developed for valuing industrial use of water and applied using data from Chinese industrial firms, where water, as well as capital, labour and raw materials, are treated as inputs to a production function. Models on price elasticity of water demand associated with the marginal productivity approach are also developed and estimated for different Chinese industrial sectors.     

Incorporating International Competitiveness into the Demand for Labour Function: Some Issues of Specification and Interpretation*

This paper attempts to clarify the theoretical status and the empirical role of measures of ‘international competitiveness’ that have been used in econometric demand for labour equations. Some currently popular alternatives are finked to a simple version of the Salter-Swan-Dornbusch (‘Australian‘) dependent economy model which is found to provide insufficient basis for choosing between alternative measures, which in the Australian case at least are found to behave rather differently. In explaining employment in Australia during the period 1971-83, the preferred competitiveness variable is found to play a marginal role only with estimated long-run elasticity similar to that for the real labour cost     

Substitution between energy,capital and labour within industrial companies: A micro panel data analysis

Based on micro panel data for industrial companies, we estimate factor demand models with electricity, other energy, labour and machine capital as flexible inputs using both the translog and the linear logit specification. As opposed to the few previous micro (cross-section) data studies we find that both electricity and other energy are complements with capital. Substitution between electricity and other energy is limited. The own-price elasticity for electricity is −0.21 in the translog model and −0.19 in the linear logit model. The corresponding own-price elasticities are −0.45 and −0.23 for other energy, −0.08 and −0.05 for labour and −0.45 and −0.34 for capital.     

Registered nurses: the impact of wages on labour force participation and hours worked – are wages an effective mechanism for addressing RN shortages with evidence from 1960 to 2008?

Registered nurses (RNs) are critical producers and coordinators of patient care in acute and non-acute settings (Needleman et al. 2011). The Affordable Care Act coupled with an ageing population, are increasing demand for health care and, in turn, RNs. Numbering 3 million, RNs comprise the largest professional occupation in health care. Therefore, the labour force participation and hours worked are of keen interest to stakeholders and policymakers. Rising demand may exacerbate nursing shortages and have important effects on costs. We estimate the impact of wages on participation and hours worked as a possible policy tool to increase nursing supply. In 2008, the RN wage had a positive and significant effect on participation and a small positive but only marginally significant effect on hours worked given participation. The latter elasticity for married females (single females) was 0.11 (0.33). Therefore, the elasticity of hours worked with respect to the nurse wage is and unlikely to have an important effect on the participation rates or hours worked of currently trained female RNs. Consequently, wage increases are unlikely to be an effective policy to increase the labour supply among the currently licensed RNs and will not relieve any short-term nursing shortage.     

Exports,Supply Constraints and Growth: An Investigation using Regional Data

In this work we first model the role of demand‐ and supply‐side factors (labour market adjustment, productive efficiency) in explaining economic growth. Empirically testing the model, we evaluate why different growth regimes may appear in the 20 Italian administrative regions. This exercise uses a two‐stage econometric approach. Estimates for the elasticity of manufacturing output to exports are obtained from regional time series: a significant long‐run relationship indicates the existence of a demand‐constrained growth regime. We then ascertain whether the regional dispersion of supply‐side factors has an impact on the regional dispersion of growth regimes. The empirical evidence supports our expectations of strong regional differences. Southern regions are less likely to display demand‐constrained regimes. In explanation of these differences, second‐stage analysis reveals that a strong role is played by such efficiency‐enhancing factors as technological innovation, bank diffusion and ‘social capital’. No role is found for labour market rigidities.     

Wage inequality and skill supplies in a globalised world

We investigate empirically, and explain theoretically, how the relative wages of skilled and unskilled workers vary with their relative supplies in open economies. Our results combine the insights of simple labour market and trade models. In countries that trade, relative wages respond inversely to variation in skill supplies, but the response decreases with the degree of openness to trade and is small in very open countries. To reconcile our results with standard estimates of the elasticity of substitution between skilled and unskilled workers, we allow also for the influence of directed technical change and income elasticity of demand for skill-intensive goods.     

The role of the wage-productivity gap in economic activity

This paper argues that wages lagging behind productivity is a long-run structural phenomenon due to the interplay of wage dynamics and productivity growth. We call this interplay frictional growth, a term that can only be nullified in the utopian case of zero growth and/or no dynamics. In that vein, we challenge the prevailing view of the neutrality of the labour income share and investigate its impact on the evolution of employment. We thus estimate wage setting and labour demand equation systems – for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960–2008 period – and find that the labour share is negatively associated with employment even when the conventional assumption of a unitary long-run elasticity of wages with respect to productivity holds. Acknowledging the presence of the wage-productivity gap in both the short and long run, this work stands as the building block for assessing the effect of the falling labour share on economic activity. As recent work has shown that the widening wage gap is also an important factor prompting inequality, it can be argued that by supporting employment the falling labour share ‘sweetens’ the impact of rising income inequality, and, as such, deserves the attention of policy makers.