Abstract
PurposeThis paper aims to test the hypothesis that the effect of production slowdown on labour demand can be muted by labour hoarding.Design/methodology/approachThis study adopts a production function approach, using data from Malta, a small state in the EU.FindingsThe results confirm the hypothesis and indicate that firms are normally prepared to employ and dismiss more workers in the long run than in the short run.Practical implicationsThis finding has important implications for developed countries, including that labour hoarding can be of certain relevance in times of economic slowdown as shocks are absorbed by internal flexibility.Originality/valueThe results of this study add on to the existing literature in two ways. First, this study compares two industries –manufacturing and financial services– for which the former sector received support to hoard labour after the financial turmoil of 2008. Consequently, the dominance of labour hoarding in manufacturing relative to financial services is uncovered and the effect of hoarding practices on labour demand is estimated. Second, Malta is an interesting case because it is one of the smallest economies in the world and faces a high degree of vulnerability because of constraints associated with small size and insularity. As a result, firms adopt policy-induced measures to minimise adjustment costs.
Highlights
As the world economy is slowly recovering the deep and widespread recession since the 1930s, a policy challenge in many developed countries is the deteriorated labour market outcomes
Malta is an interesting case because it is one of the smallest economies in the world and faces a high degree of vulnerability because of constraints associated with small size and insularity
The transmission of shocks on goods market to the labour market does not happen instantaneously, and some kind of time lag is observed. This hypothesis was tested using a production function approach, using the marginal productivity condition for labour derived from the constant elasticity of substitution (CES) production function
Summary
As the world economy is slowly recovering the deep and widespread recession since the 1930s, a policy challenge in many developed countries is the deteriorated labour market outcomes. Job shedding became widespread and unemployment increased at record levels in most developed countries. As observed in many studies, unemployment increases have been contained in countries with comparatively strong internal flexibility (Eichhorst et al, 2010; CarballoCruz, 2011; Eichhorst, 2014; Muffels et al, 2014). Journal of Economics, Finance and Administrative Science Vol 23 No 46, 2018 pp. Published in Journal of Economics, Finance and Administrative Science. The full terms of this licence may be seen at http://creativecommons.org/ licenses/by/4.0/legalcode
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