Elasticity Of Labor Demand Research Articles

Profit Sharing, Wage Formation and Flexible Outsourcing Under Labor Market Imperfection

We combine profit sharing and outsourcing, if the wage for worker is decided by a labor union to analyze how does the implementation of profit sharing affect individual effort and the bargained wage and thus outsourcing? We find that profit sharing and the wage level have an individual effort-augmenting effect and therefore increase productivity. We also find that the wage effect of profit sharing is ambiguous. There is a wage decreasing substitution effect, but on the other hand, there is a wage increasing effect via labor demand elasticity so that outsourcing and employment effects are also ambiguous.

EMPLOYMENT AND DEADWEIGHT LOSS EFFECTS OF OBSERVED NONWAGE LABOR COSTS

I. INTRODUCTION Nonwage labor costs consist of several mandated benefits, health, training, accident, housing plans, as well as several taxes, and are intended to increase workers' welfare and job security. However, these benefits tend to come at the expense of reducing employment and deadweight losses. To quantify these resulting effects, one needs a reliable measure of the employment labor cost elasticity. Most studies conducted on this subject find low estimated values for this elasticity, which contrasts with policy-makers' enthusiasm to reduce labor In this article, using a Peruvian-matched firm-workers data set, we find that nonwage labor costs reduce employment measured in total hours of work by 17% for white collars and by 53% for blue collars with associated deadweight losses of 10% and 35% of total contributions' revenues, respectively. We also compute employment losses of compliance with mandated employers' and workers' contributions of 4% for white collars and 12% for blue collars, with respective associated deadweight losses of 2% and 6% of contribution revenues. These results come from estimating the long-run unconditional firm-level labor demand function by a procedure that corrects for endogeneity of wages. We show that unbiased estimates, even using small units such as firm-level data, require not only that wages are exogenous but also that their unobserved determinants are uncorrelated with the unobserved determinants of labor demand. This requirement is not fulfilled in the likely event, pointed out by Becker (1993), that larger firms are matched with more productive workers. Consequently, an estimation that corrects for endogeneity yields a larger labor cost elasticity of labor demand than one that does not, like ordinary least squares (OLS). In the past two decades, there has been intensive theoretical and empirical research on the effects of labor market frictions on job creation. Western European economies, characterized by large job security provisions, have been the center of attention of this research that has modeled these frictions as adjustment costs in labor demand (Bentolila and Bertola 1990; Hamermesh 1989; Hopenhayn and Rogerson 1993; Nickell 1987; Rendon 2004). This literature finds that the effects of eurosclerosis, that is, labor markets with high firing costs, are ambiguous: in good times, sclerotic labor markets create fewer jobs than free labor markets; however, in bad times, sclerotic labor markets reduce job destruction. Most of the research done in Latin America has been done under these guidelines, obtaining statistically significant negative effects of job security provisions on employment rates. (1) Furthermore, using country-level data for Latin America and Organization for Economic Cooperation and Development countries, Heckman and Pages-Serra (2000) found large effects of job security provisions on employment, (2) which are robust to several specifications, OLS, random, and fixed effects. The authors present their results as a strong evidence against Freeman's (2000) view that job security regulations mostly affect distribution, but not efficiency, and advocate the substitution of job security provisions by other mechanisms that provide income security at lower efficiency and inequality costs. Under a classic labor demand framework and using worker- and firm-level data, this article provides new evidence in the same direction, extending the computation of the effects of job security provisions to deadweight losses. Hamermesh (1993) surveys several studies on the estimation of labor demand and remarks that estimates of the labor cost employment elasticity should be interpreted and compared cautiously depending on the specification adopted. Capital is an explanatory variable in a short-run labor demand estimation; it is not in a long-run labor demand estimation. Similarly, output is included in the estimation of a conditional labor demand but excluded in the estimation of an unconditional labor demand. …

Revisiting Marshall's Third Law: Why Does Labor's Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand?

The third Marshall–Hicks–Allen rule of elasticity of derived demand purports to show that labor demand is less elastic when labor is a smaller share of total costs. As Hicks, Allen, and then Bronfenbrenner showed, this rule is not quite correct, and actually is complicated by an unexpected negative relationship involving labor's share of total costs and the elasticity of substitution. The standard intuitive explanation for the exception to the rule presented by Stigler and referenced in many textbooks describes a situation rather different than the one described in the rule. The author presents an example that illustrates the peculiar negative impact of labor's share operating via the elasticity of substitution and then explains why the unexpected relationship between labor's share of total cost, the elasticity of substitution, and the elasticity of labor demand holds.

Fiscal Effects of Minimum Wages: An Analysis for Germany

Abstract Against the background of the current discussion of statutory minimum wages in Germany, this paper analyzes the potential employment and fiscal effects of such a policy. Based on estimated labor demand elasticities obtained from a structural labor demand model, the empirical results imply that minimum wages in Germany will be associated with significant employment losses among marginal and low- and semi-skilled full-time workers. Even though minimum wages will lead to increased public revenues from income taxes and social security benefits, they will result in a significant fiscal burden, due to increased unemployment benefits and decreased revenues from corporate taxes.

OFFSHORING, MULTINATIONALS AND LABOUR MARKET: A REVIEW OF THE EMPIRICAL LITERATURE

AbstractThis paper reviews the empirical literature on the effects of offshoring and foreign activities of multinational enterprises on developed countries' labour markets. Results suggest that material offshoring worsens wage inequality between skilled and unskilled workers; it also seems to make employment more volatile, by raising the elasticity of labour demand and the risk of job losses. Service offshoring exerts at most small negative effects on total employment, and changes the composition of the workforce in favour of high‐skilled white‐collar employees. Multinationals tend to substitute domestic and foreign labour in response to changes in relative wages across countries; substitutability is weak, however, and mainly driven by horizontal, market‐seeking foreign direct investments.

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.

Labour Market Dynamics in Australia: What Drives Unemployment?

The debate in Australia on the (constant-output) elasticity of labour demand with respect to wages has wrongly sidelined the role of capital stock as a determinant of employment (Webster, 2003). As far back as 1991, Pissarides had argued that the influence of capital stock on the performance of the labour market is crucial but not well understood, a research area which is particularly relevant for Australia. This paper attempts to fill this void by estimating a multi-equation labour market model comprising labour demand, wage setting and labour supply equations. The model is used to examine the causes of the unemployment upturn in 1973-1983 and the subsequent decline in 1993-2006. Our results show that (i) the main determinants of the unemployment rise in the 1970s and early 1980s were wage-push factors, the two oil price shocks and the increase in interest rates, and (ii) the acceleration in capital accumulation was the crucial driving force of unemployment in the 1990s and 2000s. Furthermore, although the recent boom in the terms of trade is equally important, its downward effect on unemployment was partially reversed by the resulting decrease in net foreign demand.

How Robust are Simulated Employment Effects of a Legal Minimum Wage in Germany?: A Comparison of Different Data Sources and Assumptions

Several empirical minimum wage studies have recently been published that simulate employment effects of a federal minimum wage in Germany. We disentangle various factors that explain the variation in previous simulation results. Based on data from the German Socio-Economic Panel and the newly available Verdienststrukturerhebung 2006 we conduct robustness analyses that systematically test the range in the outcomes of different labor demand simulations. We find that labor demand effects are sensitive to measurement errors in wages, the representativeness of the sample with respect to several types of labor inputs as well as estimated and assumed labor demand and output price elasticities. Interactions of those determinants may lead to substantial differences in simulation outcomes.

Labour market effects of public capital stock: evidence for the Spanish private sector

This paper provides a new rationale for the positive effect of public capital stock on employment and wages. We show that higher levels of public capital reduce wages along the wage equation and enhance employment due to the resulting larger elasticity of labour demand with respect to wages. The estimation of a structural model for the Spanish private sector reveals that this wage channel is empirically relevant. We use the estimated parameters to simulate the recent incidence of the ratio of public to private capital stock on the private sector economic performance. We find (i) sizeable effects on employment, capital stock and gross domestic product, and (ii) that the wage channel is particularly important for employment.

Union Wage Demands with Footloose Firms

This paper analyses the wage demands of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model is used to describe how firms relocate: in function of international differences in production costs and market size. The union sets wages in function of the firm level labour demand elasticity and the responsiveness of firms to relocate internationally. If countries are suffciently symmetric lower foreign wages and lower trade costs necessarily lead to lower union wage demands. With asymmetric countries these intuitive properties do not always hold. But even for symmetric countries it holds that small increases in market size or trade costs makes union wages more sensitive to the foreign wage level.

Macroeconomic Interdependence Under Collective Wage Bargaining

This paper uses a two-country, sticky-price model with non-atomistic wage setters to study the role of collective wage bargaining in the propagation of monetary shocks. I find that the welfare transmissions of a monetary expansion are reinforced by different labor market structures. Non-atomistic domestic unions anticipate that their wage demands raise real labor income through a movement of the terms of trade. This leads to an additional channel of transmission of monetary policy that goes through aggregate supply. Yet, workers benefit more from a monetary expansion when the exchange rate pass-through is not limited and the elasticity of substitution across traded goods is sizable. It follows that wage mark-ups charged by unions endogenously vary with those structural parameters. In particular, labor and product market distortions are strategic substitute in affecting the perceived labor demand elasticity.

Equilibrium unemployment with outsourcing under labour market imperfections

We study the effects of international outsourcing on equilibrium unemployment in a high-wage economy with labour market imperfections. We demonstrate, consistent with empirical results, that the wage elasticity of labour demand is increasing as a function of outsourcing. Furthermore, we show that a production mode with more outsourcing reduces the negotiated wage in a high-wage country with labour market imperfections if the relative bargaining power of the labour union is sufficiently high. Under such circumstances outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode showing that stronger labour market imperfections induce a production mode with more outsourcing.

Globalisation Squeezes the Public Sector - Is it so Obvious?

It is widely perceived that globalization squeezes public sector activities by making taxation more costly. This is attributed to increased factor mobility and to a more elastic labour demand due to improved scope for relocation of production and thus employment across countries. We argue that this consensus view overlooks that gains from trade unambiguously work to lower the marginal costs of public funds, and moreover that globalization via increased trade in intermediaries may actually lower the labour demand elasticity.

Reconciling National and Regional Estimates of the Effect of Immigration on U.S. Labor Markets: The Confounding Effects of Native Male Incarceration Trends

In this paper, we reconcile the disparity between regional and national level estimates of the effect of immigration on native earnings. The reconciliation derives from the fact that existing national level studies fail to adequately control for changes in other determinants of the wage structure that correspond closely with the skill distribution of immigrant shocks. We focus specifically on the effect of accounting for incarceration trends. Over the past thirty years, an increasing proportion of low skilled native workers have served time in prison, a development that has arguably harmed their employment prospects. We show that the fraction of a given education-experience group that is immigrant is strongly correlated with the fraction of native born workers in the demographic group that is institutionalized. Holding constant incarceration trends considerably diminishes the estimated magnitude of the reduced-form relationship between native labor market outcomes and the fraction in their skill cell that is immigrant.An alternative interpretation of these findings offered by Borjas, Grogger, and Hansen (2006) is that immigration-induced wage declines have pushed more men into criminal activity which, in turn, has increased the incarceration rate. The authors present a model whereby the reduced form effect of immigration on incarceration reflects the product of (1) the effect of immigration on wages and (2) the elasticity of labor demand in the crime sector. The latter elasticity gauges the extent to which the local crime market is able to absorb additional offenders as the quality of legitimate work opportunities (as measured by wages) diminishes. While national level correlations presented by the authors are consistent with this interpretation, we show that the state level results are not. Despite a sizable and statistically significant negative reduced-form effect of immigrant penetration on wages in state-level panel regressions, there is no statistically significant relationship between state-level immigrant shocks and state-level incarceration rates - i.e., despite an identifiable dose to state-level wages, there is no incarceration response. Estimates of the elasticity of demand in the criminal sector using both the original state-level estimates presented in Borjas, Grogger, and Hansen (2006) as well as our replication and simple alternative specification of these regressions are essentially zero. Thus, we conclude that immigration has had no impact on criminal activity among natives operating through labor market competition.

A Short Note on Marshall's Third Law of Derived Demand: Why Does Labor's Share Interact with the Elasticity of Substitution to Decrease the Elasticity of Labor Demand?

The third Marshall-Hicks-Allen rule of elasticity of derived demand purports to show that labor demand is less elastic when labor is a smaller share of total costs. As Hicks, Allen, and then Bronfenbrenner showed, this rule is not quite correct, and actually is complicated by an unexpected negative relationship involving labor's share of total costs and the elasticity of substitution. The standard intuitive explanation for the exception to the rule, due to Stigler, describes a situation rather different than the one described in the rule. In this paper, I present an example that illustrates the peculiar negative impact of labor's share, operating via the elasticity of substitution. I then explain why the unexpected relationship between labor's share of total cost, the elasticity of substitution, and the elasticity of labor demand holds.

The effect of international trade on labour-demand elasticities: empirical evidence from Tunisia

This paper investigates the effects of trade liberalization on labour demand elasticities. The employment demand equation is estimated by using data for manufacturing industries in Tunisia covering the period from 1971 to 1996. The empirical results suggest a weak support for the idea assuming that trade liberalization will lead to an increase in labour demand elasticities: in the vast majority of industries considered, we cannot reject the hypothesis of no relationship between trade openness and labour-demand elasticities. This weakness of labour demand elasticity in practice is perhaps explained by the tight labour market regulations in place during the 1987–1996. However, these results are robust to the type of labour considered (contract labour and permanent labour). This supports the conclusion that under liberalization labour markets have become more flexible, and that employers prefer recruiting contract workers.

Determinants of the demand for regular farm labour in South Africa, 1960–2002

This paper estimates long-run price (wage) elasticities of demand for regular farm labour in South Africa using both Ordinary Least Squares (OLS) regression and a Two-stage Least Squares (2SLS) simultaneous-equation model for the period 1960–2002. Both models include a piecewise interactive slope dummy variable with 1991 as the threshold year to reflect South African (SA) commercial farmers' expectations that farm labour costs would increase as new labour legislation was introduced from the early 1990s onwards. The long-run price (wage) elasticity of demand for regular farm labour in South Africa during 1960–1990 was estimated as −0.25 for OLS and −0.23 for 2SLS regression, respectively. For the period 1991–2002, this elasticity estimate rose to −1.32 and −1.34 for OLS and 2SLS regression, respectively. These results suggest that a marked structural decline in the demand for regular labour has occurred since 1991 that raises questions about the appropriateness of labour laws and minimum wage legislation that have increased the cost of regular farm labour in South Africa.

Matching bias in labor demand estimation

Using a matched firm-worker dataset, we show both theoretically and empirically that positive assortative matching between firms and workers leads to an underestimation of the absolute value of wage elasticity of labor demand.

The elasticity of labor demand and the minimum wage

We show that, contrary to widespread belief, low-pay workers do not generally prefer that the minimum wage rate be increased until the labor demand is unitary elastic. Rather, there exists a critical value of elasticity of labor demand so that increases in the minimum wage rate make low-pay workers better off for higher elasticities, but worse off for lower elasticities. This critical value decreases with unemployment benefits and increases with workers’ risk aversion. We also show that in some countries the benefits for long-term unemployed are so low that workers would probably prefer that the minimum wage rate be decreased.

Offshoring, Labour Market Institutions and the Elasticity of Labour Demand

This paper analyses the evolution of the elasticity of labour demand and the 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. The finding that employment has become increasingly sensitivity to wages is shown to be robust to a wide variety of econometric specifications of labour demand, although some of this association may reflect a trend increase in the speed of adjustment rather than an increase in the long-run wage elasticity. A second finding is that more intensive offshoring is associated with more elastic labour demand, consistent with increased offshoring having expanded the flexibility of firms to adjust the mix of domestic workers and foreign value-added in production when relative factor prices change. More in particular, the average elasticity of labour demand appears to be about 30% to 40% larger in absolute value than the counter-factual elasticity which would have prevailed had offshoring not been possible. Increases of this magnitude might well have important implications for job security and worker bargaining power. Finally, we find some evidence that strict employment protection legislation weakens the link between offshoring and higher labour demand elasticity. This suggests that the impact of offshoring on labour demand elasticity depends on the national institutional environment.