Abstract
In this paper we examine the relationship between labor supply and industry-level output in the context of the specific factors model. Jones (Trade, balance of payment and growth: essays in honor of Charles P. Kindleberger, Amsterdam, pp 3–21, 1971) shows that a rise in the amount of labor in the economy will increase the output in all industries. We empirically show which industry output is predicted to expand more when the size of labor force grows. Unlike the commonly used Rybczynski Theorem (Economica 22:336–341, 1955) of the Heckscher-Ohlin model, the specific factors model shows that a comparison both of labor intensities and labor demand elasticities plays an important role in determining which output expands relatively more when the size of labor force grows. For this purpose, we illustrate the importance of the parameters of the model in determining how changes in the labor supply affect the output change, with special reference to elasticities of substitution in production. We estimate the elasticity of substitution by using CES production function and show how these estimates describe the general equilibrium of production with one mobile factor (labor) and 25 industries of the US economy using data for 1979–2001. We show that the increase in the supply of labor raise output in all industries, but the magnitudes of the increases in some industries are more than others depending on the value of the elasticity of substitution along with factor intensities between industries. The largest output effect occurs for educational, health care and social service, where a 1 % supply of labor increase would raise output 10.5 %. However, the growth in the labor supply has a small impact on output growth in the range of 0.1–0.6 % in agriculture, petroleum, coal product and finance and insurance industries.
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Notes
Edwards and Whalley (2007) test the factor mobility assumption by assuming capital to be a third immobile factor slowing the movement of output or mobile factors in response to price changes. This assumption results in very little change in prices and a significantly reduced “magnification” effect on wages associated with output changes and factor movements.
In Jones and Ruffin (2008) this analysis is conducted for two sectors but, it can be generalized in a simple fashion to any number of sectors.
The equations in the model are derived from Jones and Ruffin (2008).
See Survey of Current Business (2000) for detailed definitions and methodology to calculate indices.
See Balistreri et al. (2003).
From the firm’s standpoint, elasticity of substitution describes the responsiveness of the cost-minimizing capital-to-labor ratio to changes in the wage-to-rental ratio in the long run. According to Nelson (1965), the elasticity of substitution depicts an index of the rate at which marginal returns diminish as one factor is increased relative to the other factor. If the elasticity of substitution is large, then it is not difficult to substitute one factor for the other or to enlarge output by enlarging one factor.
The initial estimation results were tested for the non-constancy of error terms by performing White’s test for homoscedasticity. All error terms in the equations proved to be homoscedastic.
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We are particularly grateful to Roy Ruffin for his helpful suggestions.
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Akay, G.H., Dogan, C. The effect of labor supply changes on output: empirical evidence from US industries. J Prod Anal 39, 123–130 (2013). https://doi.org/10.1007/s11123-012-0290-2
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DOI: https://doi.org/10.1007/s11123-012-0290-2