Tests of representative firm models: results for German manufacturing industries

Many studies of producer behavior consider cost and input demand functions de-rived from microeconomic theory and estimate them on the basis of aggregate data. If firms' characteristics differs, the neglect heterogeneity can lead to estimation bias. An alternative is to restrict individual behavioral functions to be linear in the firm specific parameters. The aim of this paper is to describe aggregate producer behavior without placing too strong restrictions on the functional form and to explicitly take account of firm heterogeneity. Estimation for German manufacturing sectors confirms that ne-glected heterogeneity is an important source of bias in representative agent models. --exact aggregation,representative firm,heterogeneity,demand system

The Demand of Heterogeneous Labour in Germany

In this paper, four commonly provided explanations for the shift in labour demand for different skill groups are investigated: the substitutability of inputs; the own-price sensitivity for different types of labour; the effect of economic growth and the impact of technological change. In general, the shift of demand away from unskilled labour can be explained by the large own-price elasticity of unskilled labour and by biased technological change. During the period of 19771994, the rate of biased technological progress against unskilled workers seems to be as large in the traded as in the non-traded goods industries. Furthermore, in three out of five sectors considered, technological change is biased towards high-skilled labour. --technological change,heterogeneous labour

The aggregate Le Chatelier Samuelson principle with Cournot competition

This paper studies the aggregate substitution and expansion effects triggered by changes in input prices, in a context where firms supply a homogenous commodity and compete in quantities à la Cournot. We derive a sufficient condition for the existence of a Cournot equilibrium and show that this condition also ensures that the Le Chatelier-Samuelson principle is likely to be satisfied in the aggregate at the Cournot equilibrium, although it may not be satisfied at the firm level. These results are confirmed by the empirical findings obtained for two-digit US manufacturing industries, which also highlight the importance of imperfect competition for understanding aggregate growth, investment and employment. --Aggregation,returns to scale,market power,markup,own-price elasticity

Curvature conditions and substitution pattern among capital, energy, materials and heterogeneous labour

This study deals with the determinants of factor demand in 27 industries of the manufacturing sector during the period 1978 to 1990. Using a quadratic cost function, six production factors are distinguished : capital, energy, three types of labour and intermediate materials. A parametric test of the concavity of the cost function in prices is provided and price elasticities are compared when curvature conditions are imposed or not. The result show, firstly, that in general estimates do not appear very sensitive to imposing theoretical restrictions implied by optimising behaviour. Secondly, demand for unskilled and medium skilled labour than any other pairs of inputs. --curvature conditions,elasticities of substitution,skill structure

Outsourcing of services, imported materials and the demand for heterogeneous labour : an application of a generalised box-cox function

This paper examines the effects that purchased services and imported intermediate materials have on the labour demand for different skills in the manufacturing sector. We derive and estimate a factor demand system based on the generalised Box-Cox cost function nesting both the normalised quadratic and the translog functional form. We find that the impacts of output and capital growth are more important in explaining the demand for heterogeneous labour than substitution effects between labour and non-labour inputs. Similarly, the increasing use of both imported materials and purchased services is rather a consequence of output growth than input substitution. --Outsourcing of services,intermediate imports,heterogeneous labour,Box-Cox cost function

A dynamic heterogeneous labour demand model for German manufacturing

This paper presents an application of the Generalised Error Correction Model (GECM) for heterogeneous factor demands based on the quadratic cost function. Using data for 26 West German manufacturing industries over the period 1976-1995, it turns out that less general specifications such as the partial adjustment and the static AR(1) model are rejected. Furthermore, both shortrun and long-run labour demands of different skill classes are inelastic. Unskilled labour is found to have a somewhat higher wage elasticity in absolute terms than medium-skilled labour. A small part of shift in demand away from unskilled labour can be explained by the substitutability relationship between intermediate materials and unskilled labour. Between 6 and 13 percent of the observed shift towards high-skilled labour can be explained by capital accumulation. --heterogeneous labour demand,dynamics,price elasticities

Imposing and testing curvature conditions on a Box-Cox function

We present a new method for imposing and testing concavity of a cost function using asymptotic least squares, which can easily be implemented even for cost functions which are nonlinear in parameters. We provide an illustration on the basis of a (generalized) Box-Cox cost function with six inputs: capital, labor disaggregated in three skill levels, energy, and intermediate materials. A parametric test of the concavity of the cost function in prices is presented, and price elasticities are compared when curvature conditions are imposed and when they are not. The results show that, although concavity is statistically rejected, the estimates are not very sensitive to its imposition. We find that substitution is stronger between the different types of labor than between any other pair of inputs. --input demands,concavity,inequality restrictions,Box-Cox

A Dynamic Heterogeneous Labour Demand Model for German Manufacturing

This paper presents an application of the Generalised Error Correction Model (GECM) for heterogeneous factor demands based on the quadratic cost function. Using data for 26 West German manufacturing industries over the period 1976-1995, it turns out that less general specifications such as the partial adjustment and the static AR(1) model are rejected. Furthermore, both shortrun and long-run labour demands of different skill classes are inelastic. Unskilled labour is found to have a somewhat higher wage elasticity in absolute terms than medium-skilled labour. A small part of shift in demand away from unskilled labour can be explained by the substitutability relationship between intermediate materials and unskilled labour. Between 6 and 13 percent of the observed shift towards high-skilled labour can be explained by capital accumulation

Curvature Conditions and Substitution Pattern among Capital, Energy, Materials and Heterogeneous Labour

This study deals with the determinants of factor demand in 27 industries of the manufactoring sector during the period 1978 to 1990. Using a quadratic cost function, six production factors are distinguished: capital, energy, three types of labour and intermediate materials. A parametric test of the concavity of the cost function in prices is provided and price elasticities are compared when curvature conditions are imposed or not. The results show, firstly, that in general estimates do not appear very sensitive to imposing theoretical restrictions implied by optimising behaviour. Secondly, demand for unskilled labour is relatively elastic to wage increases compared to the higher skill levels. Third, the substitutability is stronger between unskilled and medium skilled labour than any other pairs of inputs

Outsourcing of Services, Imported Materials and the Demand for Heterogeneous Labour: An Application of a Generalised Box-Cox Function

This paper examines the effects that purchased services and imported intermediate materials have on the labour demand for different skills in the manufacturing sector. We derive and estimate a factor demand system based on the generalised Box-Cox cost function nesting both the normalised quadratic and the translog functional form. We find that the impacts of output and capital growth are more important in explaining the demand for heterogeneous labour than substitution effects between labour and non-labour inputs. Similarly, the increasing use of both imported materials and purchased services is rather a consequence of output growth than input substitution