Output, wages and the demand for labour: evidence from panel data

Paavo Peisa and Heikki Solttila
Additional contact information
Paavo Peisa: Bank of Finland
Heikki Solttila: Bank of Finland

Finnish Economic Papers, 1988, vol. 1, issue 2, 174-183

Abstract: Using a sample of small and medium sized firms, we investigate the relationship between wages and employment. Our data reveal a stable cross-section correlation between wages and productivity, consistent with the neoclassical demand for labour theOly in general and the Cobb-Douglas assumptions in particular. These results do not indicate anything about the direction of causation. A positive correlation between wages and productivity can arise from capital- labour substitution as wages change but other explanations are also plausible. Intervening variables are for example a particular concern in the analysis of panel data. In this paper, the neoclassical theOlY is tested in the generalized random effects framework put forward by Chamberlain. A series of exogeneity tests gives some support to the neoclassical notion that at the micro level, wages affect employment and productivity but not vice versa. The evidence presented is rather weak, however, and our data do flot reject a restriction to a purely static relationship. In this specification. parameter estimates are not neoclassical. The wage-elasticity estimates obtained from the neoclassical cost-minimization model are of order 0.2-0.4, which is quite reasonable. Qur results give support to the hypothesis that measurement errors have biased some of the earlier elasticity estimates from panel data towards 1.

Date: 1988
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.taloustieteellinenyhdistys.fi/images/stories/fep/fep19882_3.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:1:y:1988:i:2:p:174-183

Access Statistics for this article

More articles in Finnish Economic Papers from Finnish Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Editorial Secretary ( this e-mail address is bad, please contact ).