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Long‐run Asymmetries in Labor Demand: Estimating Wage Elasticities of Labor Demand Using a Fractional Panel Probit Model

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  • Arnd Kölling

Abstract

Models of labor demand usually use cost or production functions to derive profit‐maximizing firm performance. These models often rely on the assumption of symmetrical behavior, i.e., the response to a positive or negative wage shock of the same relative size is identical to the shock, and the estimated labor demand elasticities are the same for increasing and decreasing employment. However, behavioral economics models like loss aversion and endowment effects question the assumption of symmetry in labor demand. In addition, the influence of a labor shortage should be reflected in the investigations. Estimations of Fractional Panel Probit models for three different skill levels are applied to evaluate these findings with a large panel of German establishments. The results indicate asymmetrical structures for long‐run own‐wage elasticities and for some cross‐wage elasticities, putting some doubt on the assumption of strict rationality in labor demand and indicating the influence of labor shortages.

Suggested Citation

  • Arnd Kölling, 2020. "Long‐run Asymmetries in Labor Demand: Estimating Wage Elasticities of Labor Demand Using a Fractional Panel Probit Model," LABOUR, CEIS, vol. 34(1), pages 26-47, March.
    • Handle: RePEc:bla:labour:v:34:y:2020:i:1:p:26-47
    DOI: 10.1111/labr.12163
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    Cited by:

    1. Mario Bossler & Martin Popp, 2022. "Labor Demand on a Tight Leash," Papers 2203.05593, arXiv.org, revised Feb 2024.
    2. Bossler, Mario & Popp, Martin, 2024. "Labor Demand on a Tight Leash," IZA Discussion Papers 16837, Institute of Labor Economics (IZA).

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