Increasing labor demand and labor productivity in Ghana

The first objective is to identify the determinants of labor demand in Ghana. This includes measuring the substitution parameters between homogenous labor and capital, and indirectly estimating the own-wage elasticity of demand for labor as well as the cross-elasticities among heterogeneous labor inputs. The second objective is to assess the effects of some conceptually identified non-firm-level factors, such as hiring and firing regulations, on the demand for labor. The third objective is to model value-added per worker, a surrogate for labor productivity, as a function of firm-level variables such as the capital-labor ratio, the real wages paid to workers, the type of ownership, the age of machinery and equipment used by firms, and capacity utilization. The study used panel data from five manufacturing industries and cross-sectional data from firms across all sectors of the economy. The panel data covers the period 1972 to 1984, while the cross-sectional data was collected in 1995. Results of the study revealed that there is considerable ease in substitution between capital and labor in the industries studied. This suggests that firms replace workers with machinery and thus reduce the demand for labor when the price of machinery becomes cheaper relative to wages either through subsidized cost of credit or overvalued currency. The study found that firms" labor demand is to a large extent influenced by who operates the firms and how. For example, foreign-owned firms tend to hire more workers, as do firms with higher capacity utilization. While the data could not permit discriminating between public and private ownership, making such a distinction may reveal profound effects on the employment level and productivity. Further assessment of labor demand concluded that capital constraints, concerns about firing laws, and labor costs are major factors reducing the likelihood that firms will hire more workers. The assessment of the determinants of labor productivity showed that the capital-labor ratio, wages of production workers, and capacity utilization are the major factors with statistically significant impacts on value-added per worker. Finally, the study found that there has been a consistent technical retrogression over time in the manufacturing industries studied. Includes policy recommendations and references. (Author abstract, modified)