The specification and estimation of a model for the Maltese aggregate labour market

Abstract

In this thesis an aggregate labour market model is formulated and its parameters are estimated using Maltese annual time-series data, covering the years 1954-1979. Many empirical studies on labour markets do not make adequate allowance for the possibility of disequilibrium, and some contain the assumption, explicit or otherwise, that the wage rate continually cleared the market. This present work does not impose this constraint, and the labour market model specified in such a way as to enable the researcher to judge whether or not the assumption of equilibrium is valid. The study opens with some background information about the Maltese economy, since the interrelationships to be investigated occur within this setting. This is followed by two chapters dedicated to a discussion on the specification of the labour demand and labour supply relations. In the chapter that follows, it is argued that the labour demand and labour supply equations cannot be estimated in isolation from each other because of the possible simultaneous determination of labour supply and demand and of wage rates, and that since disequilibrium is a distinct possibility, specific allowance should be made for it. The labour market model proposed in this study turns out to be a simultaneous system of equations, which apart from the labour supply and demand equations, contains a wage adjustment equation, and an equation explaining the observed quantity of labour in relation to labour supply and demand. The results obtained from the estimation of the model suggest that the labour market in Malta was not characterised by equilibrium during the period of our study. As expected, it was found that the balance between labour demand and labour supply is influenced by real output, the working age population, real wage rates and by short run factors such as partial adjustment of labour demand to its desired level, and labour supply response to cyclical fluctuations. Another important conclusion that emerges from our study is that real wage rate changes are influenced by the balance between labour demand and labour supply, and also by non-competitive forces, in particular Union pushfulness. An implication drawn from these results is that some form of trade off may have to be sought to achieve acceptable rates of real wage increases and of involuntary unemployment.