Trade and Technological Explanations for Changes in Sectoral Labour Demand in OECD Economies

This paper sets out to establish the main determinants of variations in the demand for aggregate labour in manufacturing and service sectors (22) for a cross-section of OECD countries (14). We employed a relatively new panel data set in our analysis, the OECD's International Sectoral Data Base. Preliminary analysis revealed that the "within" sector variation in the wage share dominated overall variation for most countries and time periods. A separate dynamic model was thus generated to explain the "within" sector variation in the wage share. This model contained real wages, output, the capital stock, technological change (total factor productivity) and trade (the imports to value-added ratio) as independent variables. In addition we also interacted the wage level with these explanatory variables on the presumption that skill is positively correlated with the level of wages. Because of the potential for simultaneity bias, estimation was conducted by IV and OLS. The main findings were that the capital stock and technological change were the main determinants of shifts in labour demand. While some countries reported the trade variable as significant its influence was only of slight importance in most cases. The interaction terms proved to be significant in a large number of countries. We found some evidence that capital and technological were complementary with skill. Overall we found broad agreement across countries in the factors which influence labour demand despite considerable differences in the cross-country nature of labour market institutions.