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Policy reform and labour demand in branches of Sri Lankan manufacturing industry


  • John Gibson
  • Ananda Patabendige


Many policy reforms in developing countries aim to remove factor market distortions. Whether such reforms reduce unemployment depends partly on the substitution possibilities between labour and other factors of production. This paper examines labour demand in seven branches of Sri Lankan manufacturing industry, using data on 4-digit industrial categories over the 1990 to 1997 period. The Box-Cox transformation is used to allow for flexible, and data-dependent, elasticities. The elasticity of capital-labour substitution varies widely across the branches of industry and is usually variable rather than constant. The average, long-run own-wage elasticity of labour demand for the manufacturing sector is estimated as -0.80, so factor price policy should have an important effect on labour demand in this setting.

Suggested Citation

  • John Gibson & Ananda Patabendige, 2006. "Policy reform and labour demand in branches of Sri Lankan manufacturing industry," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1459-1467.
  • Handle: RePEc:taf:applec:v:38:y:2006:i:12:p:1459-1467
    DOI: 10.1080/00036840500367997

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    References listed on IDEAS

    1. Kwon, Jene K. & Williams, Martin, 1982. "The structure of production in South Korea's manufacturing sector," Journal of Development Economics, Elsevier, vol. 11(2), pages 215-226, October.
    2. Prema-chandra Athukorala & Sisira Jayasuriya, 2000. "Trade Policy Reforms and Industrial Adjustment in Sri Lanka," The World Economy, Wiley Blackwell, vol. 23(3), pages 387-404, March.
    3. Reghubendra, J. & Murty, M.N. & Paul, S. & Rao, B.B., 1992. "An Analysis of Technological Change, Factor Substitution and Economies of Scale in Manufacturing Industries in India," Papers e9214, Western Sydney - School of Business And Technology.
    4. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    5. Hsing, Yu, 1989. "Testing for the functional form of labor-demand equations: The textile industry," Journal of Economics and Business, Elsevier, vol. 41(4), pages 355-364, November.
    6. Athukorala, Prema-chandra & Rajapatirana, Sarath, 2000. "Liberalization and Industrial Transformation: Lessons from the Sri Lankan Experience," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 543-572, April.
    7. Laumas, Prem S. & Williams, Martin, 1981. "The elasticity of substitution in India's manufacturing sector," Journal of Development Economics, Elsevier, vol. 8(3), pages 325-337, June.
    8. Freeman, Richard B & Medoff, James L, 1982. "Substitution between Production Labor and Other Inputs in Unionized and Nonunionized Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 220-233, May.
    9. Lane, Julia & Hakim, Guillermo & Miranda, Javier, 1999. "Labor Market Analysis and Public Policy: The Case of Morocco," World Bank Economic Review, World Bank Group, vol. 13(3), pages 561-578, September.
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