The effect of labor supply changes on output: empirical evidence from US industries

In this paper we examine the relationship between labor supply and industry-level output in the context of the specific factors model. Jones (Trade, balance of payment and growth: essays in honor of Charles P. Kindleberger, Amsterdam, pp 3–21, 1971 ) shows that a rise in the amount of labor in the economy will increase the output in all industries. We empirically show which industry output is predicted to expand more when the size of labor force grows. Unlike the commonly used Rybczynski Theorem (Economica 22:336–341, 1955 ) of the Heckscher-Ohlin model, the specific factors model shows that a comparison both of labor intensities and labor demand elasticities plays an important role in determining which output expands relatively more when the size of labor force grows. For this purpose, we illustrate the importance of the parameters of the model in determining how changes in the labor supply affect the output change, with special reference to elasticities of substitution in production. We estimate the elasticity of substitution by using CES production function and show how these estimates describe the general equilibrium of production with one mobile factor (labor) and 25 industries of the US economy using data for 1979–2001. We show that the increase in the supply of labor raise output in all industries, but the magnitudes of the increases in some industries are more than others depending on the value of the elasticity of substitution along with factor intensities between industries. The largest output effect occurs for educational, health care and social service, where a 1 % supply of labor increase would raise output 10.5 %. However, the growth in the labor supply has a small impact on output growth in the range of 0.1–0.6 % in agriculture, petroleum, coal product and finance and insurance industries. Copyright Springer Science+Business Media, LLC 2013