Academic journal article Atlantic Economic Journal

Changing Elasticities of Labor Demand in U.S. Manufacturing

Academic journal article Atlantic Economic Journal

Changing Elasticities of Labor Demand in U.S. Manufacturing

Article excerpt

Introduction

A substantial body of work has documented unequal shifts in labor demand for workers of different skill categories in U.S. manufacturing through the 1980s. However, there remains an ongoing debate concerning the relative importance of international trade (Ravenga 1992) and skill-biased technical change (Berman et al. 1994) as primary sources for these shifts. Morrison and Siegel (2001) address both potential sources for asymmetric labor demand shifts and find evidence of somewhat clearer effects associated with technical change.

Despite the volume of recent attention to the influences reshaping labor demand, there has been surprisingly little discussion as to whether or not labor demand elasticities have changed over time. Hirsch and Schumacher (2001) argue that changes in market competition and production opportunities "not only shifted labor demand, but also increased the elasticity of demand for union labor" contributing to a "worsening tradeoff between wages and employment," "moderate restraint among labor unions and the narrowing union wage gap evident since the mid-1980s." However, the literature has not provided direct estimates of own-wage elasticity changes over time to confirm their underlying assertion.

We employ a traditional framework in which relative price-induced input substitution responses are estimated separately from cost-induced scale responses. Changes over time in both own-price and cross-price elasticities of labor demand across U.S. manufacturing industries are evident. These changes are not symmetric for production and nonproduction workers in this application, and our approach facilitates insights regarding the relative contribution of proposed sources.

Technical Change, Trade and Labor Demand

A long-standing interest in employment responses is reflected by numerous studies over the years, providing estimates of own-wage and cross-price elasticities of labor demand. Early examples of empirical work based on U.S. manufacturing industries include McKinnon (1962) and Nadiri (1968). The sensitivity of elasticity measures to restrictive functional forms is emphasized by Clark and Freeman (1980), who provide updated estimates. Differing responses across labor categories have remained a topic of particular interest following contributions by Griliches (1969) and others involving skilled and unskilled workers. Public policy concerns motivate much of the early work in this area. For example, Kesselman et al. (1977) evaluate the potential impact of investment tax credits versus employment tax credits based on labor demand elasticity estimates for production and nonproduction workers in U. S. manufacturing industries.

Hamermesh (1993) provides a comprehensive review of the labor demand literature and establishes a consensus range of -.15 to -.75 for own-wage elasticity estimates. Empirical studies based on U.S. manufacturing industries are consistent with the broader literature on this point and suggest that own-wage elasticities for production workers reside in the upper half of the consensus range.

An additional motivation became more common with extraordinary changes in collective bargaining outcomes throughout the 1980s. The prominent role of the own-wage elasticity of labor demand in union wage-employment determination is described in a recent review by Kaufman (2004). This constitutes a fundamental tradeoff at the heart of the monopoly union model explored in various industry- specific empirical applications. Hirsch and Schumacher (2001) argue that increased elasticity of labor demand has contributed to observed wage outcomes for unionized workers.

Numerous studies have confirmed skill-biased technical change as a source of asymmetric shifts in labor demand. Berman et al. (1994), for example, document a declining share of production labor within U.S. manufacturing industries over the 1980s. A host of complementary studies attribute these changes primarily to investments in new production technologies. …

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