Energy price shocks and the dynamic demand for energy and labor inputs in the manufacturing sector of Puerto Rico

In the early 1970's and 1980's energy price shocks affected most of the industrialized nations including Puerto Rico. For this period monthly data for consumption of electricity, average weekly hours worked per worker, number of production and non-production workers are available for the manufacturing sector of Puerto Rico. This research takes advantage of this data to study the dynamic and interrelated demand for energy and labor inputs of production. A dynamic cost-minimization model of the firm is developed based on three theoretical concepts: the difference between the intensive and extensive utilization of inputs of production, the concept of adjustment costs, and expectations. In this model the endogenous variables are current levels of energy consumption, intensive and extensive use of production workers, and extensive use of non-production workers. The exogenous variables are the price of energy, hourly wage, and exports. This model generates a system of dynamic inputs demand equations where inputs demand and utilization are function of current, lagged, and expected values for endogenous and exogenous variables. Thus the system of inputs demand equations is empirically estimate with a multivariate and structural vector autorregressive model using ordinary least squares. The structural part correspond to current values of the exogenous variable. And, the autorregressive component of the regressions includes lagged values for the endogenous and exogenous variables until a period of eight lags. The coefficient estimates suggest there is a significant dynamic interaction among the demand for energy and labor inputs which is mainly channeled through production workers. Impulses responses were calculated to describe the short-run and medium-responses of inputs to shocks in the exogenous variables and to other inputs. Unexpected increases in the price of energy and in the hourly salary have a negative impact on inputs utilization, while a sudden increase in export has a positive impact in all the inputs at least in the short run. Energy and hours showed to be the most flexible and quicker inputs and production and non-production workers are the most sluggish to respond to unexpected changes.