Aggregate demand and wage effects on manufacturing employment in Australia 1954-55 to 1984-85

Abstract

Interest in the relative roles of wages and demand in determining employment can be traced to Keynes' General Theory. This gave rise to research into the cyclic relationship between employment and wages, and also into the role of wages and demand variables as determinants of the demand for labour. This thesis pursues the second line of inquiry which can be categorised as a comparison of neoclassical and Keynesian explanations of the demand for labour in which the former stresses the role of wages and the latter the role of demand variables. There is no consensus in the literature about the relative imponance of wage and aggregate demand variables in labour demand models. The Australian manufacturing sector forms the data for this study. The demand for labour in Australian manufacturing rose from the mid-1950s to 1973-74. During this time employment in manufacturing behaved in much the same way as it did in the rest of the economy. From the mid 1970s employment in manufacturing began a sustained decline while that of the rest of the economy grew. There are four main features of the thesis. The first is that it analyses the demand for labour in Australian manufacturing over a long time period (30 years). Second, alternative specifications of the demand for labour are systematically compared, which includes testing the importance of appropriately modelling the capital stock and technical progress. Third, the role of aggregation in identifying an appropriate labour demand function is investigated. An integrated approach to investigating the relative importance of wage and demand variables, which includes testing the robustness of the specifications, forms the fourth feature of the thesis. The conclusions derived from a systematic study of the Australian manufacturing sector using a long time series of disaggregated data are that: - if technical progress and investment are jointly modelled as time trends, then the real wage is a highly significant determinant of labour demand (this result is very sensitive to the specification chosen); - the importance of the demand effects in the labour demand function are sensitive to the level of aggregation chosen: and, - if the method of modelling MFP and investment is accepted and the level of aggregation chosen appropriate, then both real wages and aggregate demand have significant effects on labour demand over the period studied. Show more