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Factor Prices, Expectations, and Demand for Labor

Kanhaya L. Gupt

Abstract

This paper examines the determinants of the demand for labor by fourteen two-digit manufacturing industries of India, and in particular the role of factor prices and expectations, to aid understanding of the causes of the low rates of labor absorption in the manufacturing sector. This is done within the framework of neoclassical models of factor demand. A method is suggested for measuring expectations. Our results show that adverse factor prices, long adjustment lags, low output elasticities, and the shift in the industrial structure in favor of the capital goods sector are some of the more important factors responsible for the observed low rates of labor absorption. Finally, some implications of our results for studies relating to labor demand functions in general are discussed.