Rules of Thumb for Estimating Changes in Industry Level Employment

We develop four rules of thumb for estimating how industry level employment responds to changes in production. These rules can be used to estimate employment effects when labor and capital are not explicitly modeled. Many employment estimates from these types of analyses assert that labor increases in proportion to output without specifying the underlying assumptions about labor and capital. Other estimates assume that either labor or capital is fixed. We develop a simple set of calculations that embody four alternative assumptions for factor demand and supply. For the proportional returns rule, we find that employment grows at the same rate as output if the technology is Leontief or both the wage rate and rental rate of capital are fixed and technology is homothetic and exhibits constant returns to scale. If instead the capital stock is fixed, the diminishing returns rule indicates that employment increases at a greater rate than output due to the diminishing returns to capital. The value of marginal product rule shows that wages increase in proportion to labor productivity and the change in price if capital and labor are fixed. When technology is homothetic and exhibits returns to scale, the returns to scale rule shows that changes in employment are inversely proportional to the degree of the returns to scale. See above See above