Ross Hutchings and Michael Kouparitsas¹

Treasury Working Paper 2012-02²

Date created: February 2012
Date modified: December 2012

Abstract

We derive a conditional long-run labour demand equation via a representative firm-level profit maximising problem, where production takes place according to a constant elasticity of substitution (CES) production function. This theoretical framework is augmented by cyclical explanatory variables to form an error correction model, which is then estimated using standard econometric methods. Estimates of important labour demand parameters, such as the elasticity of substitution between capital and labour, are consistent with previous Australian studies.

JEL Classification Numbers: J01, J23, J50

Keywords: labour demand, technical change, production function

Ross Hutchings
Domestic Economy Division
Macroeconomic Group
The Treasury
Langton Crescent
Parkes  ACT  2600

Michael Kouparitsas
Domestic Economy Division
Macroeconomic Group
The Treasury
Langton Crescent
Parkes  ACT  2600

1 Domestic Economy Division, Macroeconomic Group, The Treasury, Langton Crescent, Parkes ACT 2600, Australia. Correspondence: michael.kouparitsas@treasury.gov.au. We thank Owen Freestone, Bryn Battersby, Shakira Jones, Josiah Munro and participants at the Macroeconomic Theory and Application seminar for suggestions on earlier drafts.

2 The views expressed in this paper are those of the authors and do not necessarily reflect those of The Australian Treasury or the Australian government.

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