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Estimating Labor Demand Elasticities and Elasticities of Substitution in Egyptian Manufacturing Sector: A Firm-Level Static Analysis

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Abstract

This paper analyzes central issues of labor demand: How do wages affect employers demand for labor? And does this differ according to skill levels? Specifically, this study measures the own-wage elasticities of the demand for labor, in addition to the elasticities of substitution between different labor inputs disaggregated according to skill in Egypt. Estimates of such phenomena at the firm level are rare for developing countries in general and for Egypt in particular, and this paper happens to be the first in the Egyptian case. The evidence indicates that unskilled workers are substitutes for all other labor types, while all other three types—the semiskilled production workers, skilled workers and professionals—are complements to each other. Results also indicate that skilled workers wage elasticities are higher than those for all other types of labor. We can also conclude that labor demand in Egypt is inelastic, no matter the skill level.

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Notes

  1. It is worth noting that for the Egyptian case one may argue that using occupations is not really equivalent to examining labor demand for skills among workers. As for example, the ILO School-to-Work Transition Survey for Egypt in 2012 shows that fully one-third of workers are overqualified for that they do. However, that was unavoidable given that the survey data used only include wages classified by occupations and not by education.

  2. For a detailed survey on these studies, see Hamermesh (1989).

  3. These results go along with Hamermesh’s (1993) call for more relevant disaggregation of labor input. According to him, the simple skilled versus non-skilled classification may be too broad. Hamermesh (1993) pointed out the possible capital–skill complementarity and called for measuring parameters of interest based on disaggregated data that classify labor into groups which account for skills, and proper measures of the capital input (Addison et al. 2014).

  4. The level of disaggregation of labor is restricted by data availability on the relevant sub-groups and on the respective wages.

  5. Capital is modeled as quasi-fixed input factors in the production. While labor is considered to adjust instantaneously to their long-run equilibrium, capital as a quasi-fixed input is believed to adjust only partially within one period, due to adjustment costs (Freier and Steiner 2010).

  6. Justification of this approach in the context of labor demand estimation is due to Bond and Van Reenen (2007), Addison et al. (2005). Moreover, results reached by Behar (2010) confirmed that if lack of data prevents the use of costs of capital, omitting capital would not affect the estimates badly.

  7. After testing for it, technological assumptions can be enforced on both the cost function and the share equations. It can be shown that Biy= 0 \(\forall\)i implies homotheticity (referring to the independence of returns to scale of factor prices) by differentiating the cost function with respect to log Y. If the cost function is homothetic, then it is homogeneous of degree r if By= 0, with \(r = \frac{1}{{\alpha_{y} }} \cdot \alpha_{y} = 1\) corresponding to constant returns to scale (Behar 2010).

  8. This approach is used broadly; according to Hammermesh’s 1993 literature survey, most of the studies at the industry-level regress quantities on prices and consider the results as labor demand only (Slaughter 2001).

  9. Firms are classified according to the International Standard Industrial Classification of All Economic Activities (ISIC) codes 15–37 (manufacturing), 45 (construction), 50–52 (whole sale and retail trade), 55(hotels and restaurants), 60–64(transport, storage and communications) and 72 computer and related activities) (ISIC Rev.3.1).

  10. Firms with 100% government/state ownership are not eligible to participate in an Enterprise Survey.

  11. Construction is included in the services establishments although one would argue it is considered as a “production” industry along with mining and quarrying and it is more often included with manufacturing. However, the Egypt Enterprise Survey 2008 conducted by the World Bank and used in this paper includes it in the services sector. This is because it follows firms classification according to International Standard Industrial Classification of All Economic Activities (ISIC Rev.3.1) codes 15–37 (manufacturing), 45 (construction), 50–52 (whole sale and retail trade), 55 (hotels and restaurants), 60–64 (transport, storage and communications) and 72 computer and related activities) (ISIC Rev.3.1), where construction is not included in manufacturing.

  12. Permanent workers are all paid long-term employees (those employed for 1 year or more) with guarantee of renewal of employment contract.

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Acknowledgements

Funding was provided by Economic Research Forum (Grant No. 2016-025).

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    Hanan Nazier

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Appendices

Appendix 1

See Fig. 3.

Fig. 3
figure 3

Histogram for residuals of cost function regression

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Appendix 2

See Table 6.

Table 6 Estimated parameters of the SURE model
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Nazier, H. Estimating Labor Demand Elasticities and Elasticities of Substitution in Egyptian Manufacturing Sector: A Firm-Level Static Analysis. Ind. J. Labour Econ. 62, 549–575 (2019). https://doi.org/10.1007/s41027-019-00186-5

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