Michigan's Employment Problem and the Elasticity of Substitution

Abstract

IN AN interim report on the Profile of Michigan study conducted in the Graduate School of Business at the University of Chicago, Stephen P. Sobotka concluded that Michigan's unique industrial composition has had a very marked impact on the observed trends in and that these trends have been accentuated by the relative ease with which the major industry in the state has been able to substitute other factors of production for labor.' The elasticity of substitution between production-worker man-hours and other inputs was estimated to be -2.8 in the transportation equipment industry (SIC 37), the largest employer of all two-digit manufacturing industries in Michigan, as compared with elasticities ranging from -0.2 to -1.7 in sixteen other two-digit industries. Only tobacco manufacturing, an unimportant employer in Michigan, showed a greater elasticity of substitution (-3.8). In contrast, the elasticity of the petroleum and coal products industry was positive (1.3) but statistically nonsignificant. The average for Michigan manufacturing, computed from nationwide industry elasticities and Michigan production-worker man-hours, disregarding the petroleum and coal products industry, was estimated to be -1.6. Sobotka commented: in 1957 average wages in Michigan had been no higher than average wages in the [East North Central] region as a whole, they would have been about 18 cents per hour or about 7 per cent lower than they were. If we use the state's average elasticity of substitution as a guide, a reduction of 18 cents per hour in wages would have brought about approximately an 11 per cent increase in [production worker] employment. He went on to say that if unions have been able to raise wages by, say, 10 per cent, they may have decreased employment in the organized Michigan industries by about 16 per cent as against 12 per cent for the region as a whole: a difference of about 4 per cent in unions' effect on employment, and he presented a table of hypothetical results to illustrate his argument. In his final report, Sobotka again reported a high elasticity of substitution in the transportation-equipment industry, namely, 2.04.2 He stated that the elasticities of substitution had been computed separately for each of the 4 years 1954* Financial support for this analysis was given by the School of Labor and Industrial Relations, and assistance with computations was given by Frank J. Bonello.