Policy reform and labour demand in branches of Sri Lankan manufacturing industry

Abstract

Many policy reforms in developing countries aim to remove factor market distortions. Whether such reforms reduce unemployment depends partly on the substitution possibilities between labour and other factors of production. This paper examines labour demand in seven branches of Sri Lankan manufacturing industry, using data on 4-digit industrial categories over the 1990 to 1997 period. The Box-Cox transformation is used to allow for flexible, and data-dependent, elasticities. The elasticity of capital-labour substitution varies widely across the branches of industry and is usually variable rather than constant. The average, long-run own-wage elasticity of labour demand for the manufacturing sector is estimated as -0.80, so factor price policy should have an important effect on labour demand in this setting.