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

Author

Listed:
  • Paavo Peisa

    (Bank of Finland)

  • Heikki Solttila

    (Bank of Finland)

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.

Suggested Citation

  • Paavo Peisa & Heikki Solttila, 1988. "Output, wages and the demand for labour : evidence from panel data," Finnish Economic Papers, Finnish Economic Association, vol. 1(2), pages 174-183, Autumn.
    • Handle: RePEc:fep:journl:v:1:y:1988:i:2:p:174-183
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    References listed on IDEAS

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    1. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318, Elsevier.
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