An empirical analysis of the demand for labor in the manufacturing sector
Date
1983-03
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Abstract
The study attempts to analyze the impact of the various determinants of the demand for labor on the employment in the manufacturing sector in general and in selected export-oriented and non-export-oriented manufacturing industries in particular. Similarly, it estimates the elasticity of factor substitution in each of these industries. The analysis is developed on the basis of a labor demand equation using the constant elasticity of substitution (CES) production function.
A least square multiple regression using data for the period 1956-75 revealed that the variables factor price ratio and output are very important determinants in the demand for labor in the entire manufacturing sector and in both export-oriented and non-export-oriented manufacturing industries although the importance is more pronounced in the export-oriented group of industries.
An estimate of the elasticity of factor substitution in the various export-oriented and non-export-oriented industries underscored the varying ability of each industry to substitute labor for capital and vice versa.
A simulation of the effects of the changes in the user cost of capital and the cost of labor confirmed the negative effects of the various BOI incentives with capital cheapening bias on the demand for labor in the industries. A direct subsidy on labor cost encourages employment growth. The overall assessment of the BOI incentive package is still restricting as far as labor absorption is concerned.
The findings of this paper suggest a need to formulate more incentives neutral in their effects on the relative use of capital and labor in production. Moreover, the varying responsiveness of employment to various economic variables underscores the need for a different set of incentives for different types of industries.