Empirical Estimates of Labor Demand

Methods of estimation

Perhaps a far more troublesome aspect of empirical demand estimation is the identification problem. The estimate the labor demand response to changes in wage, the wage variations must be exogenous. When are observed wage changes exogenous?

These caveats notwithstanding, here are some "stylized facts" from labor demand studies:

Other studies uses more special situations to help solve the identification problem. One instance when you will find a convincing case of exogenous wage change is when the minimum wage changes (though one might argue that legislators don't raise the minimum wage when labor demand curve is slack). Thus, studying the employment effects of minimum wage is an important part of empirical labor demand studies.

Quite often, instead of estimating a labor demand curve, it is more useful to estimate an inverse labor demand curve. That is, instead of regressing employment on wages, we may regress wages on employment. To estimate a labor demand curve, we need exogenous variations in wages--which are hard to find. To estimate an inverse labor demand curve, we need exogenous variations in employment. Exogenous variations in employment may arise because of immigration flows, so people may study labor demand by looking at the wage response to increased immigration. This approach, however, does not always give us a representative picture of the whole economy because immigrants typically are only a small fraction of the labor force.

Others have exploited the fact that population often changes for reasons other than wage changes. For example, there was a baby boom in the U.S. shortly after World War II. These baby boomers entered the labor market some twenty years later. So in the late sixties and early seventies, there is a especially large cohort of new labor market entrants. To clear the market, the wage of these baby boomers must fall relative to the wages of other cohorts. Finis Welch (1973) finds that this was indeed the case.

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