AN EMPLOYMENT EQUATION FOR AUSTRALIA: 1966-2001

We model the relationship between hours of work and employment and argue that unless actual hours are varying with a change in ‘standard hours’, actual hours should not appear in the long-run component of an equation for employment. If however standard hours are changing then it is desirable that this variable be incorporated into the employment equation. Our theoretical model yields an expression for the elasticity of employment with respect to standard hours which shows that the elasticity is related to the size of the premium for overtime. Using quarterly data for the period 1966:3 – 2001:3 we estimate a new employment equation for Australia incorporating standard hours of work. We find empirical support for our approach and we provide new estimates of the elasticity of employment with respect to the real wage and GDP. We also find a marked asymmetry in the response of employment to variations in real GDP and real wages in recession periods as against non-recession periods.