Research Note: Revenue and Labour Demand in the Hotel Industry: An Investigation of Endogeneity

Abstract

This paper investigates the effect of hotel room revenue on labour demand based on data for international tourist hotels in Taiwan. Past empirical research on the relationship between hotel room revenue and labour demand has failed to take into account the fact that the causality between these two variables can be a two-way rather than just a one-way relationship. In other words, room revenue can affect labour demand and vice versa. The authors address this issue by using an instrumental variables (IV) regression approach in which room revenue and hotel labour demand can be determined simultaneously. The empirical results indicate that a failure to account for the two-way causality will underestimate the effect of room revenue on labour demand. The findings are of particular importance to hotel managers as the authors provide more accurate estimates for the relationship between hotel room revenue and labour demand.