A dynamic heterogeneous labour demand model for German manufacturing

This study presents an application of the Generalized Error Correction Model (GECM) for heterogeneous factor demands based on the quadratic cost function. Using data for 26 West German manufacturing industries over the period 1976-1995, it turns out that less general specifications such as the partial adjustment and the static AR(1) model are rejected. Furthermore, both short-run and long-run labour demands of different skill classes are inelastic. Unskilled labour is found to have a somewhat higher wage elasticity in absolute terms than medium-skilled labour. A small part of the shift in demand away from unskilled labour can be explained by the substitutability relationship between intermediate materials and unskilled labour. Between 6 and 13 percent of the observed shift towards high-skilled labour can be explained by capital accumulation.