Input demand and the short and long-run employment thresholds: An empirical analysis for the German manufacturing sector

The concept of the ’employment threshold’ plays an important role in the public discussion of unemployment. The employment threshold is defined as that growth rate of output necessary to keep employment constant despite the continuous rise in productivity. It is related to the Okun coefficient which describes the relationship between the changes in output and unemployment. Many contributions to this debate give the impression that the employment threshold is more or less a structural characteristic independent of economic variables. In this paper we derive short- and long-run employment thresholds from an input demand system and show empirically that they depend on factor prices and capital accumulation. Higher wage rates raise the employment threshold and reduce the probability that a positive output shock will increase employment.