Estimating the U.S. aggregate demand for labor

Abstract

This paper develops an equation to estimate the U.S. aggregate demand for labor that incorporates the impact of the information technology (IT) capital stock and IT outsourcing, as well as the role of employee benefits relative to employee wages over time. The theoretical starting point is a production function with strategic nonlinearities that does not restrict labor to diminishing marginal productivity over all potential values of the labor input. Specific attention is given to data aggregation issues caused by chain-weighted indexes. Empirical estimation of the equation specification implies that the ratio of employee benefits to wages has the largest negative impact to the demand for labor. Estimation results also imply that there is a direct, short-term negative effect from IT outsourcing, as well as an indirect negative effect through interaction with IT capital. Further empirical investigation suggests that the effect of IT outsourcing turns positive in the longer term through its impact on the stock of capital equipment.