5 EMPIRICAL ANALYSIS
5.3 Estimation results
Our estimated elasticities of labour demand for total labour and each labour type (pro-duction and non-pro(pro-duction) are presented in figures 5.1, 5.2, 5.4 and 5.5. Figures plot manufacturing-wide elasticities each year for the each specification using three-year and five-year differencing. To represent better the underlying trends, as Slaughter (2001) argues, the figures plot three-year moving averages of the estimated elasticities. The estimates seem very plausible and well estimated. For all specifications their estimates lie within the range of[-0.09, -0.80] that Hamermesh (1993) proposes as plausible based on his literature survey. Furthermore, all point estimates are negative, and all are statis-tically significant. Overall, unskilled labour is found, as expected, to have somewhat higher wage elasticities in absolute terms than skilled labour. In addition, these patterns are very consistent across both the three-year and five-year differenced specifications.
In figures 5.1a, 5.1b and 5.1c is presented estimated constant-scale-return labour-demand elasticities for total, production and non-production labour, and in figures 5.2a, 5.2b and 5.2c estimated scale effect labour-demand elasticities. The basic result is that labour demand became more elastic over integration. Constant-output elasticities of total labour demand declined steadily, except during deep depression early1990 in Finland,53 to around -0.75. Also, by using instruments we see that total labour demand became more elastic during 1980s and 1990s. Unexpected, there is more relative growth
53 Labour demand is more sensitive to the economic cycle than integration process during deep depres-sion.
in elasticities for non-production labour than production labour. Furthermore, we see that own-price demand elasticities of both labour types are underestimated. The diffi-culty is that the aggregation of labour inputs by the production function is an arbitrary description of technology. If the labour sub-aggregates are not separable from non-labour inputs, one will underestimate own-price demand elasticities, and infer that the types of labour are greater price-substitutes that in fact they are. Because of this prob-lem of the separable of inputs and thus underestimated elasticities for both labour types I assess the effects of integration on the elasticities only for total labour demand. The scale-effect labour-demand elasticity estimates express changes in product-market com-petitiveness working through the scale effect. In comparison to the constant-output elas-ticity estimates the scale-effect elaselas-ticity estimates seem more plausible and well esti-mated. According to the correlation squares (R2), GLS-estimator performs better over-all, within and between by using instruments than supposing constant scale return.54
If both constant-output and scale-effect elasticities of labour demand are consistently estimated then the difference between these two is an estimate of the scale effect. In figure 5.3 is presented how much estimates of the instruments provide indirect evidence – i.e. decreasing unexplained difference - about the scale effects of integration on the elasticities. Although, our instruments may not adequately control for shifts in product-market demand, we note that the difference between constant-output and scale-effect elasticities of labour demand became nearer an estimate of the scale effect55 over inte-gration (except during deep depression). This result provides support for the hypothesis that economic integration has contributed to increased elasticities of labour demand via scale effects.
54 For example, theR-sq (within) of last year (5-year differencing) for total labour demand is 0.3086 by using instrument and 0.1036 by supposing constant scale effect. For brevity, allR-sq (overall, within and between) andCHI-sq statistics for each year, each specification, total labour and both labour types, and both differencing are not reported. In summary, some statistics for the few years, each specification, total labour, and 3-year differencing are provided in the Appendix 1.
55 For total labour demand the scale-effect estimates lie within the range of [0.26, 0.55], and they all are statistically significant. The positive sign of this coefficient shows that in the short run an increase in demand of outputs is associated with an increase in demand of all inputs.
Figure 5.1 Estimated constant-output labour-demand elasticity (3-year moving averages of 3-year and 5-year differencing) estimates for total labour (a), production labour (b), and non-production labour (c). The specification is (3.1) ∆ln(Lit)=αt∆ln(ωit)+µt∆ln(Ψit)+βt∆ln(Yit)+eit.
1a) Constant-output elasticities of total labour demand
Diff3
Diff5 -0,9
-0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
1b) Constant-output elasticities of production labour demand
Diff3
Diff5 -0,9
-0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
1c) Constant-output elasticities of non-production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
Figure 5.2 Estimated scale-effect labour-demand elasticity (3-year MA of 3-year and 5-year differencing) estimates for total labour (a), production labour (b), and non-production labour (c). The specification is (3.2).
2c) Scale-effect elasticities of non-production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
2a) Scale-effect elasticities of total labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
2b) Scale-effect elasticities of production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
Figure 5.3 How much effect estimates do not explain difference between constant-output and scale-effect labour-demand elasticity estimates for total labour.
In figures 5.4a, 5.4b and 5.4c is presented estimated constant-substitution labour-demand elasticities for total, production and non-production labour, and in figures 5.5a, 5.5b and 5.5c estimated substitution-effect labour-demand elasticities. We see that there is growth in capitconstrained elasticities for all labour types over integration, al-though labour demand became less elastic during deep depression. Constant-substitution and substitution effect elasticities of total labour demand declined to around -0.4. Un-skilled labour is found, as expected, to have somewhat higher wage elasticities in abso-lute terms than skilled labour. Empirical studies usually point to a lower degree of sub-stitution between skilled labour and capital than between unskilled labour and capital.
The integration forces changing labour substitutability by making labour less/more eas-ily substituted for foreign factors of production depending on complementarity between human capital and physical investment. Surprisingly and counter-intuitively, there is more relative growth in elasticities for skilled labour than unskilled labour. Because of problem of the separable of inputs, as discussed above, I assess the substitution effects of integration on the elasticities only for total labour demand in case of the gross
substi-Unexplained difference between constant-output and scale-effect elasticities for total labour demand
-0,35 -0,30 -0,25 -0,20 -0,15 -0,10 -0,05 0,00
1979 1983 1987 1991 1995 1999
Diff3 Diff5
tution. Under gross substitution between labour and capital the labour demand is sup-posed to depend on the capital costs positively.56 For example, in specifications (3.1) and (3.2) the coefficient of gross elasticity has mostly positive and statistically signifi-cant sign for total labour demand. The substitution-effect labour-demand elasticity esti-mates express changes in international outsourcing working through the substitution effect. In comparison to the constant-substitution elasticity estimates the substitution-effect elasticity estimates seem more plausible. According to the R2s, GLS-estimator performs better overall, within and between by using instruments than supposing con-stant capital stock.57
If both constant-substitution and substitution-effect elasticities of labour demand are consistently estimated then the difference between these two is an estimate of the substi-tution effect. In figure 5.6 is presented how much estimates of the instruments provide indirect evidence about the substitution effects of integration on the elasticities. Al-though, our instruments may not adequately control for shifts in international outsourc-ing, we note that the difference between constant-substitution and substitution-effect elasticities of labour demand became nearer an estimate of the substitution effect58 over integration (except late1980). This result provides support for the hypothesis that eco-nomic integration has contributed to increased elasticities of labour demand via substi-tution effects.
56 Conversely, in case of the complementarity, the labour demand depends on the capital costs negatively.
57 For example, the R-sq (within) of last year (5-year differencing) for total labour demand is 0.1078 by using instrument and 0.0255 by supposing constant capital stock.
58 For total labour demand the substitution-effect estimates lie within the range of [0.045, 0.226], and they all are statistically significant. The positive sign of this coefficient shows that in the short run higher de-mand of non-labour inputs induced by increased dede-mand of outputs is associated with higher employ-ment.
4a Constant-substitution elasticities of total labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
4b Constant-substitution elasticities of production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
4c Constant-substitution elasticities of non-production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
Figure 5.4 Estimated constant-substitution labour-demand elasticity (3-year MA of 3-year and 5-year differencing) estimates for total labour (a), production labour (b), and non-production labour (c). The specification is (3.3)∆ln(Lit)=ρt∆ln(ωit)+χt∆ln(Kit)+eit.
5a Substitution-effect elasticities of total labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
5b Substitution-effect elasticities of production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
5c Substitution-effect elasticities of non-production labour demand
Diff3 Diff5
-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0
1975 1979 1983 1987 1991 1995 1999
Figure 5.5 Estimated substitution-effect labour-demand elasticity (3-year MA of 3-year and 5-year dif-ferencing) estimates for total labour (a), production labour (b), and non-production labour (c). The speci-fication is (3.4).
Unexplained difference between constant-substitution and substitution-effect elasticities for total labour-demand
0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40
1979 1983 1987 1991 1995 1999
Diff3 Diff5
Figure 5.6 How much substitution-effect estimates do not explain difference between constant-substitution and constant-substitution-effect labour-demand elasticity estimates for total labour.
6 CONCLUSIONS
The purpose of this study has been twofold to investigate the effects of the economic integration on the elasticity of labour demand with own price by using theoretical model and empirical analysis. We build the theoretical framework for estimating the elastic-ities of labour demand and determining the effects of economic integration on the elas-ticities. In a general theoretical model of intra-industry trade, we analyzed how eco-nomic integration changes the labour-demand elasticity. A model captures both effects running from product markets, the scale effects, as well as factor substitutions possibili-ties, the substitution effects, to the elasticity of labour demand. We show that intensified trade competition increases the labour-demand elasticity, whereas better advantage of economies of scale decreases the labour-demand elasticity by decreasing elasticity of substitution between differentiated products. If integration gives rise to an increase in input-substitutability and/or outsourcing activities, labour demand will become more elastic.
We structured the econometric model in which the aim is to determine whether European integration has changed the own-price elasticities of labour demand in Finland using data from the manufacturing sector from 1975 to 2002. We find that over time demand for total, production and non-production labour has become more elastic in manufacturing overall. However, it is shown that there is unexpected more relative growth in elasticities for non-production labour than production labour. Furthermore, we noted that own-price demand elasticities of both labour types are underestimated.
Because of problem of the separable of inputs and thus underestimated elasticities for both labour types we assessed the effects of integration on the elasticities only for total labour demand. If both constant-output (constant-substitution) and scale-effect (substi-tution-effect) elasticities of labour demand were consistently estimated then the differ-ence between these two is an estimate of the scale effect (substitution effect). We noted that the difference between constant-output (constant-substitution) and scale-effect (substitution-effect) elasticities of labour demand became nearer an estimate of the scale effect (substitution effect) over integration. These results provide support for the hy-pothesis that economic integration has contributed to increased elasticities of labour demand.
Finally, the study points up potentially interesting area for future research. One area for further research would be to extend the integration model to capture the effect of increasing labour-demand elasticities on wage formation and thus on the structural un-employment. Our findings have important challenges for policy-making with economic integration implicating the role of profit-sharing and labour productivity.
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