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
