Employment-Output Equations for the Austrian and German Manufacturing Industries

The employment-output equation constitutes one of the econometric bases for short and medium-term employment forecasts in manufacturing. It is based on theoretical considerations which postulate a relation between expectations held by enterprises regarding output and the level of employment. Such an equation must also take account of long-term productivity effects and (labor) saving technical progress, respectively. In the older literature the long-term productivity effects were modeled by a deterministic linear or piece-wise linear trend. This approach allows the use of classical regression procedures in estimating dynamic specifications of the employment-output equation, but does not account for the time-dependent pace of technical progress. A linear trend implies a time-invariant constant rate of technical progress. The availability of new estimation techniques based on the Kalman filter allows the modeling of long-term productivity effects in the employment-output equation in the form of a stochastic trend. This is a more realistic presentation of technical progress with a time-dependent rate. The employment-output equation was estimated for the Austrian and German manufacturing industries using this new estimation method. The results yield information on three aspects, which are important for the development of employment: the short-term direct effect of changes in output on employment, the long-term output elasticity of employment and the long-term path of productivity. Growth of manufacturing output in Austria of 1 percent per quarter results in employment growth of 0.12 percent during the same period; the corresponding figure for Germany is slightly higher (0.13 percent). The long-term output elasticity of employment in Austria (0.57 percent) is slightly smaller than in Germany (0.61 percent). The third important aspect is the evaluation of the long-term productivity development which underlies the employment-output relation. The econometric results imply for Austria as well as for Germany a productivity path which can best be presented by a "random walk" with constant drift. It is remarkable that during the period between 1980 and 1990 the development of productivity in Germany's manufacturing significantly slowed down relative to Austria. This result corresponds well to the differences in the path of employment in both countries and their possible differences (Germany: reductions in working time; Austria: rationalizations in the state-owned industry). The results imply that employment in Austrian manufacturing will decrease by 3.1 percent (Germany 2.3 percent) if output remains unchanged.