Long-run Homogeneity of Labour Demand. Panel Evidence from OECD Countries

This paper is making an attempt to examine the long-run relationship between the key labor market parameters employment, aggregate output, real product wages and laboraugmenting technical progress for a sample of 21 OECD countries covering the period from 1970 to 2000. We apply a new panel error correction technique which allows us to constrain the long-run coefficients to be identical across the countries while letting the short-run coefficients which govern the dynamics, and the error variances differ freely, respectively. Thus, this estimation approach assumes that institutional and cultural differences, albeit causing short-term deviations of labor demand behavior across countries, leave the long-run structure of the labor markets unaffected. That is to say, the long-run equilibrium relationship between the key labor market variables is taken to be similar across the OECD economies. The empirical analysis shows that the long-run relationship between the key labor market parameters is equal across the OECD countries. However, adjustment speed of actual employment to the equilibrium is much higher in countries with flexible labor markets such as the U.S.A. and U.K. than in countries with rigid labor markets such as Germany and Austria.