Dynamic labour demand using error correction model

Using a new econometric model, this study provides evidence that contradicts previous assertions about the Japanese labour market. The interrelationship between employment and hours of labour is stressed in this analysis by explicitly dividing labour input into both employment and labour hours. This model enables results to be obtained through both simulation and estimation, which allow measurement of adjustment speeds and elasticity in both employment and labour hours to wages. The results of the simulations are as follows. No apparent difference in adjustment speeds between employment and hours of labour was found. The adjustment of hours of labour is more cyclical and overshoots whereas that of employment is smoother. The adjustment speed of each simulation is slower than that found in most previous studies in the present long-run simulation. It is not as slow in the short-run and policy simulations. Therefore, adjustment speeds strongly depend on the method of simulation.