Economics - Research Publications

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An employment equation for Australia: 1966-2001

DIXON, ROBERT ; Freebairn, John ; Lim, G. C. ( 2004-01)

We model the relationship between hours of work and employment and argue thatunless actual hours are varying with a change in ‘standard hours’, actual hours shouldnot appear in the long-run component of an equation for employment. If howeverstandard hours are changing then it is desirable that this variable be incorporated intothe employment equation. Our theoretical model yields an expression for the elasticityof employment with respect to standard hours which shows that the elasticity isrelated to the size of the premium for overtime. Using quarterly data for the period1966:3 – 2001:3 we estimate a new employment equation for Australia incorporatingstandard hours of work. We find empirical support for our approach and we providenew estimates of the elasticity of employment with respect to the real wage and GDP.We also find a marked asymmetry in the response of employment to variations in realGDP and real wages in recession periods as against non-recession periods.