DYNAMIC ANALYSIS OF THE LABOR DEMAND AMONG DIFFERENT INDUSTRIES

Abstract

This thesis is concerned with the determinants of the labor demand in the manufacturing sector of Malaysia and Singapore. The consideration does not rely upon the static demand for labor but also include a dynamic aspect into the labor demand function. There are two different kinds of dynamic labor demand functions employed for estimation. The first is the linear labor demand model which assumes the speed of labor adjustment as symmetric. The implicit assumption of the linear model is that the hiring costs and firing costs are identical. The second model relaxes this assumption. Since the unemployment rate is a good indicator to the economic situation, the relative sizes of the hiring and firing costs could be indicated by the sign of the unemployment rate coefficient. Moreover, since the speed of labor adjustment is partly determined by the costs of labor adjustment (hiring and firing costs), an unequal size of hiring costs and firing costs will cause the speed of labor adjustment to be asymmetric. Overall, the empirical results are encouraging. The linear model illustrates the speeds of labor adjustment in the Malaysian industries are higher than those in Singapore. With the log-likelihood test, most of the industries in Malaysia are in favor of the linear model. For those industries which are in favor of the non-linear model, all indicate the firing costs are higher than the hiring costs. It means that the speed of labor adjustment is inversely related to the unemployment rate. In the case of Singapore, the industries found within the non-linear model are higher than in Malaysia. However, for some industries, the results illustrate that the firing costs are greater than the hiring costs, which means that the speed of labor adjustment and the unemployment rate are inversely related. For some industries, on the other hand, the results show that the hiring costs are greater than the firing costs, which means that the speed of labor adjustment is positively related to the unemployment rate. In most of the industries, the own-price elasticities are inelastic. The results also indicate that most of the industries in these two countries enjoyed increasing returns in the past. Nevertheless, for the cross-price elasticity, and the parameters of the time trend and the square of time trend, most of the results are not significant. The results also show that there is a positively relationship between the capital price and labor demand.