Estimation of the Labor Force Supply Function in Iranian Provinces

Transcription

1 Estimation of the Labor Force Supply Function in Iranian Provinces Mosayeb Pahlavani Hanieh Safamanesh and Foroogh Jahantigh Abstract The labor force economic activity index rate is among the main criteria used in evaluating economic progress in most countries, especially developing countries. Labor force economic activity index rate has been defined as the percentage of individuals who are eligible for work, either employed or pursuing a career. Naturally, the greater the economic participation rate, the higher economic growth. However, it is important to recognize the factors that play significant roles in the formation, increase or decrease of active population and consequently determines the economic activity rate. The present study aims to find a suitable answer to the following question: What are the effective factors on the formation of economically active population in the Iran's Provinces? We applied Panel Data approach in order to estimate supply of labor force in 28 provinces of Iran. Our empirical finding shows that there is a positive and significant relationship between the key variables, i.e., wage and economic participation rate. Other variables such as type of employment, GDP per capita, and number of employees in the economic sectors, have been listed as control variables. Ultimately, due to the significance of wage and remuneration policies in the variation of participation rates, appropriate measures have been taken by the government for increasing productivity and consequently supply of the labor force as well as deployment of macroeconomic policies based on the present social situation that seems to be necessary. Key Words: Labor force Supply, Economic Participation, Remuneration Rate Attraction, and Panel Data. JEL Classification: J20, J21. Introduction The labor market consists of two main parts: Supply of the labor force and the demand expressed by employers for services that offered by such labor force. The goal is to achieve a correct pattern for remuneration, employment, and income. Corresponding Author: Dr. Pahlavani is an Associate professor of Economics, University of Sistan & Baluchestan, Iran MA Students in Economics, University of Sistan & Baluchestan, Iran. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 218

2 In the majority of empirical studies, the main point is labor force. Labor force in this respect is an entity with a potential to acquire combination of capabilities, knowledge, and characteristics that emerge as the collective ability to do work in order to produce economic values. Training and experience are essential to achieve such a qualified ability. Therefore, taking into account various performances of the labor market especially requirements of the labor force in terms of employment, planning, and policy making decisions would be inevitable in this regard. The volume of labor force supply is influenced by the different age groups in the population who are eligible for work (in Iran, this different age groups include the population of ten years old and over), as well as the percentages in such age groups who actually participate in the economic activities. Thus, variations in volume of the population within the above mentioned different age groups would greatly influence the volume of labor force supply. Due to the importance of this issue, in the year of 2000, Iranian Statistic Center started to perform the annual project in order to collect information about the employment status of the Iranian families, and in 2005, started to do the annual sample survey of the status quo of the labor force in Iran. Upon the completion of these surveys, statistical information regarding the employment status of Iranian people was made available and this explains why the periods have been selected for evaluation in the present research. The economic participationrelated information is given in the following table: Table 1 Economic participation rate for the period of Sample variable Man and Woman Economic participation rate 19/37 37/23 37/2 38/ /4 39/8 38 Source: Iranian Statistic Center Knowledge about the factors that bring economic participation/influence, and its increase/decrease as well as recognizing the extent of this influence, can help policy makers to evaluate the labor force supply model for Iran's provinces. Therefore, we put forward our main questions in this research as follows: 1 How the increasing wages have a significant effect on the rate of economic participation in Iran? 2 How come the effect of extra workers as a result of variations in the unemployment rate has being dominant effect in the rate of economic participation? COPY RIGHT 2012 Institute of Interdisciplinary Business Research 219

3 3 If there is a rise in the number of service sector's employees, would it increase the rate of economic participation or not? In Section 2, there are some of the leading studies which conducted in the field of labor force supply, in Section 3; the theoretical fundamentals of the proposed model are briefly reviewed. Sections 4 and 5 are dedicated to the results obtained from the approximation model and the overall conclusions drawn from the research as a whole, respectively. 2. Literature Review Upon having studied more than 759 articles in six authentic journals reflecting the modern literature used today to discuss labor force supply, Stafford (1986) concludes that labor force economists are unanimous on two points: Men do not react to the variations introduced in their wage/income, and women are particularly sensitive to such variations. Kottis (1990) believes that women s activity rate in Greece is function of men s and women s unemployment rate, employment rate in the agricultural sector, extension of urbanism, population growth rate, percentage of women 10 years old and over in the entire population of women without elementary education, percentage of individuals under 10 years in the whole population, percentage of unmarried women 10 years old and over in the total population, and percentage of men 10 years old and over outside the labor force. Leoni (1994) investigates the labor force supply in Italy from two points of view: Keynesian and neoclassical. According to the neoclassical theory, activity rate is defined as a function of unemployment rate. Leoni believes that while the unemployment rate variable coefficient is positive for some functions and negative for other functions, activity rate is always directly proportional to other variables. Results of tests conducted on the two models show that the labor force activity rate responds well to both variable groups, and so, neither model could be preferred to another one. According to Tanda (1994) women s labor force activity rate is, a function of women s to men s hourly remuneration ratio, women s and men s unemployment rate, high school and university education rate, marriage rate, ratio of the 4years old and under to the entire population, ratio of the urban population to the whole population, average duration of marriage before the occurrence of divorce, and divorce rate. Therefore, women s activity rate is indirectly proportional to women s remuneration rate, women s unemployment rate, ratio of the urban population to the total population, and average duration of marriage before the occurrence of divorce, and directly proportional to other factors. In Elhorst s (1996) view, economic participation is a function with a negative coefficient of unemployment rate, and a positive coefficient of the followings: The population group under 25, the population group between 2544, share of employment in the service sector, average rate of remuneration, and educational progress made by the population in the different age groups who are eligible for work. According to Elhorst, such a model is in agreement with the Keynesian view. Merz (2006), in his study titled Supply of Women s Collaborative Work: Documents from Germany, points out that during the past two decades, the nature of women s labor force supply has been transformed in such a way that women s employment rate is steadily increasing. In his view, such transformation in women s employment status is influenced by characteristics such as women s education, their partner s (spouse s) working hours, and number of small children in the family. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 220

4 In an article titled Education, Supply of Labor force and Local Market Development in Rural Peru, Laszlo (2008) refers to the key role of education in people s engagement in more profitable activities, and consequently their higher earning income as well as enjoying more leisure time. In addition to the role of education in reducing poverty, the author introduces another effective, instrumental variable, i.e., local market development in rural areas. Laszlo believes that investing in education, though useful, offers a slow yield (return), while investing in local market development produces quick returns through creating more job opportunities and consequently fewer working hours which would lead to reduction of domestic work in the family and increase of social activity, and this, in turn, would bring a reduction in the number of working children, as well as other benefits for the rural population. 3. Background Falihi (2000) calculates the labor force supply function; we assume the ideal function U for an individual to be 3 : U = f (x, n, A, ε) Where x is the amount of goods and services consumed by the individual, n the number of working hours, A the individual s characteristics, and ε the individual s taste, and we have U n U 0 و 0 x In this model, the budget constraint can be written as P. x w. n M x 0 M 0 Where, P is the commodity price index, w the wage rate, and M the independent income (not earned income from working). Now, if we maximize the ideal function in terms of its constraint, the following equilibrium condition is obtained w / (,,, ) U m x n A n P U / x Where, m is the final rate of substitution of the work for commodities equal to the real wage. Finally, the commodity demand function and the working hours supply function can be obtained as (Falihi, 2000) X x( P, w, M, A, ) n n( P, w, M, A, ) 3 This model is introduced for static conditions. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 221

5 According to Pencavel (1986) above method is standard procedure to obtain the labor force supply and this is a guide for the most economists that derived from the Hicks s general model of consumer demand. According to the above mentioned theory, we introduce the model used in this study. LRACT = F (LWAGE, LUEM, LGDPP, LAGR, LIND, LSER) Introduction of Variables: LRACT: logarithm of economic participation rate LWAGE: logarithm of wage rate LUEM: logarithm of unemployment rate LGDPP: logarithm of gross domestic product per capita LAGR: logarithm of agricultural sector employees share LIND: logarithm of service sector employees share 4. The experimental Results As the first step in estimation using the Panel Data Method, we will look for an answer to the following question: Would the behavioral pattern (model) for the dependent variable, i.e., the economic participation rate, be the same for different individuals? If the answer to this question is affirmative, we would have a compound/simple regression called pooled regression. However, in the case of a negative answer, the model is referred as the Panel Model which represents a behavioral pattern where the dependent variable is not the same for different people. Liemer s F test has been used in this case. As shown in Table 1, the theory based on the same behavior in all the samples and models is rejected in this case. Therefore, the given models should be evaluated by applying the Panel Data Method. In the second stage, the Huasman (1978) Test is implemented to investigate whether the individual effects are random or fixed 4? Huasman used a Sample Wald Function to do test the theory which holds that, there is no correlation between exogenous variables and disturbance elements. In Table 2, the ChiSquare Test, statistics shows that there is no correlation between random effects and exogenous variables in any of the listed models. Therefore, we conclude that random effects would bring about better specifications. 4 In fact, we are trying to answer the following question: Are the random effects or exogenous variables uncorrelated or not? COPY RIGHT 2012 Institute of Interdisciplinary Business Research 222

6 Table 2. Results of F Limmer and Hausman Test sample (1) (2) (3) F 27,247 F CAL F F F F Total Huasman Test Prob Prob Prob Chi Sq.statistic Source: Authors Calculation Now, we explain and interpret the results obtained from evaluation of the labor force supply function reported in Table 3. In all models, the factor of wage is introduced as the key variable, and other variables including Gross Domestic Product per capita, unemployment rate, and share of employees of the Agricultural/Industrial/Service sectors are considered as control variables. It is revealed from Table 3 that theoretically, the wage rate coefficient is positive, which is the acceptable sign, and in terms of significance, it expresses an error level equal to five percent. Therefore, conclusion is 1 percent increase in the real wage rate would bring about a 0.04 percent increase in economic participation. Of course, in obtaining this result, other conditions are assumed to be constant. The sign for the variable coefficient of unemployment rate which influences economic participations obtained as negative for 28 Iran's Provinces. For effectiveness of this variable, both positive and negative signs theoretically are acceptable. Therefore, negative effect of this variable represents the effect of discouraging. This problem indicates increase in the rate and number of unemployment in the society will reduce incentive to find jobs. In all the approximation models, a positive sign is obtained for the variable coefficient of the real Gross Domestic Product per capita. This positive sign could indicate the dominance of the substitution effect as compared to the income effect. The maximum value for coefficient of this variable is calculated as 8.7 percent. At error levels equal to 5 and 10 percent, this variable would be defined as significant. A negative sign is obtained for the coefficient of service sector employees share variable with respect to economic participation. In the previous pages we had stated that in the countries where agricultural and industrial sectors show a small rate of growth, there is little inclination for expansion of the service sector (Farjadi, 1999). COPY RIGHT 2012 Institute of Interdisciplinary Business Research 223

7 Economic statistics in Iran indicate that the service sector has had a higher growth rate compared to both other sectors during the period under study. However, examination of the same statistics reveals that the mentioned growth does not reflect a technological/industrial growth of the kind that would occur in the developed countries. The reduction in the share of agricultural sector, combined with the growing increase of population and transfer of labor force to the industrial sector (when conditions are not suitable for increasing the agricultural sector s output), may seem logical. However, due to the inevitable circumstances brought about by events such as: The Iranian revolution, flight of domestic and foreign capital, the IranIraq war, economic sanctions, etc., the industrial sector in Iran has not exhibited enough growth to be able to create enough jobs for the unemployed who, due to unfavorable conditions in the agricultural sector, have sought employment in the industrial sector. This condition, in turn, would lead to their being absorbed by the false service sector as a result of shortcomings including lack of economic and social infrastructures. The more people absorbed by the false service sector, the less effective economic participation in the society is expected. Thus, the spread of the service sector in Iran merely reflects the persistence of difficulties and restrictions in the Iranian industrial and agricultural sectors. The sign of the industrial sector employees share variable is positive and significant at 5 percent. Lewise (1954) believes agriculture to be among the sectors that can be utilized as a great source by the economic development process for building up an advanced industrial sector (quoted from Askari, 2004). Industrial sector employees share variable is the only variable that appears with a negative sign in the model, although this variable; along with the agricultural sector employees share variable, is evaluated as having a positive effect on economic participation rate. This is an indicative of the dominance of agricultural sector in the studied model. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 224

8 Table 3. The estimation results of labor force supply function Total sample (1) (2) (3) Variable coef t prob coef T prob coef t prob C LWAGE LUEM LGDPP LSER LIND LAGR Source: Authors Calculation 5. Conclusions and Policy Implications In the present research, different variables including the real wage rate, unemployment rate, Gross Domestic Product per capita, and employees share in the economic sectors of agriculture, industries, and services were used to investigate the effective factors on the labor force supply and economic participation. The results obtained lead us to the following conclusions: Income policies are among the factors that influence economic participation rate of individuals in the society. Appropriate measures by the government and largescale policies adopted on the basis of existing economic circumstances in the society, e.g., maintaining people s purchasing power under inflationary conditions, can greatly help to increase production productivity and consequently, job security, as well as encourage employers to absorb more labor force and pay higher wages. Since agriculture can be considered as a saving source for macroinvestments in Iran, the government as a large economic establishment in the country should pay particular attention to the agricultural sector, which is perfectly capable of producing income as well as creating jobs. The industrial sector, on its own, cannot serve the purpose of creating productive jobs and income in Iran. Instead, it should play a complementary role alongside the agricultural sector. In fact, the agricultural sector employs a great labor force, but according to the Regression Output, increase of labor force beyond a certain threshold would result in negative productivity and output. This is where the importance of the industrial sector and the prominent role of the government are revealed in that they COPY RIGHT 2012 Institute of Interdisciplinary Business Research 225

9 should make arrangements to gradually absorb this surplus labor force to productive jobs in the industrial sector. The result would be productive labor force and positive productivity in the industrial and agricultural sectors, respectively. Upon realization of such conditions, the number of individuals working in the industrial sector and consequently productive economic participation in this important sector would start to increase. The appropriate measures taken by the government for creating productive jobs in industrial and agricultural sectors would also improve the situation for service sector employees. By supporting the industrial and agricultural sectors, the government actually increases the productive job opportunities there and thus prevents entering inexpert labor force to the service sector. In fact, in order to achieve higher and more effective economic growth, we should attempt to specialize in the service sector. In other words, instead of allowing the labor force cast out by the agricultural sector to the service sector through engaging in petty jobs, i.e., working as peddlers, etc., we should direct the service sector towards more infrastructural economic activities such as transportation, communication, educational systems, setting professional training courses, and more. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 226

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