Elasticity of Substitution, Return to Scale and Efficacy of Investment in Job Creation in Agricultural Sector

Document Type : Research Article

Author

• H. Azizmohammadlou

Imam Khomeini International University

https://doi.org/10.22067/jead2.v30i4.56585

Abstract

Introduction: On the approach of job creating oriented policy, taking the determinants which affect on the job creation power of investment into account, can play very effective role in enhancing the policies results. The elasticity of substitution and return to scale are two important factors which affect the efficacy of investment in job creation. Theoretically, it could be inferred that the lower the elasticity of input substitution, the higher the effectiveness of investment expenditure in the creation of job opportunities for labor forces. On the other hand, the efficacy of investment in job creation will be increased if there is increasing in the degree of return to the scale of production. This paper aims to investigate the contribution of return to scale and elasticity of substitution to the efficacy of investment in job creation in Iran agricultural sector.
Materials and Methods: Different econometric methods were applied to analyze the data and to estimate the presented models in this paper. Augmented Dickey Fuller (ADF) method was used to test the stationary of variables and showed that all variables are I (1). The co integration between variables was tested using Jonson Co integration approach. Jonson Co integration test results rejected the hypothesis of no Co integration between the variables of the estimated models. The values of elasticity of substitution and return to scale have been calculated for the agricultural sector by estimating the coefficients of the per capita production function using Calman Filter approach. This approach was also used to calculate the effect of the investment on employment by estimating the coefficients of the labor demand function in the agricultural sector. Next, the contribution of the elasticity of substitution and return to scale to the effect of the investment on employment in the agricultural sector has been estimated using three estimation methods including ordinary least squares, robust least squares, and generalized linear models. Required date, including agricultural sector production, agricultural sector capital, agricultural sector employment, agricultural sector wage index and interest rate were gathered from Iran central bank, and Iran statistics organization during 1974-2012.
Results and Discussion: The estimation results of per capita production function in agricultural sectors show that the coefficient of labor in estimated per capita production function is negative. This reveals the existence of decreasing returns to scale in this sector during the studied period. The agricultural sector has also experienced low levels of elasticity of substitution during the period and there was no significant fluctuation in the trend of substitution elasticity. According to the estimation of labor demand function for the agricultural sector, variables like investment, production and interest rate have statistically positive effect on labor demand in this sector. Wage index, however, negatively affects the labor demand and employment in the agricultural sector. Estimating the effect of a return to scale and the elasticity of substitution on the employment effects of investment, by robust least square, reveals that one unit increase in the return to scale index leads to 0.02 unit increase in the effecting coefficient of investment on employment in the agricultural sector. The elasticity of substitution, however, has a negative effect on the effecting coefficient of investment on employment, so that one unit increase in elasticity of substitution leads to 0.077 unit decrease in the effecting coefficient of investment on employment in the agricultural sector. Ordinary least squares and generalized linear models estimation also show that a one unit increase in the return to scale index leads to 0.009 unit increase in the effecting coefficient of investment on employment in the agricultural sector. Elasticity of substitution, however, has a negative effect on the effecting coefficient of investment on employment, so that one unit increase in elasticity of substitution leads to 0.06 unit decrease in the effecting coefficient of investment on employment in the agricultural sector. All findings are in line with theoretical expectation and verify the positive role of return to scale and negative role of elasticity of substitution on the employment effects of investment in the agricultural sector.
Conclusion: The policy making the implication of the findings is that the allocation of investment to agricultural subsectors with a higher degree of return to scale and lower degree of substitution elasticity, would enhance the efficacy of investment in job creation in the agricultural sector. Improving factor productivity via integrated the agricultural lands and utilizing new irrigation systems, in this regard, lead to enhance the degree of return to scale and increase the job creation potential of investment in this sector.

Keywords

• Expansion path
• Inputs substitution
• Production scale
• State- space Model

20.1001.1.20084722.1395.30.4.4.5

References

1- Alili M. Z. 2015. An empirical investigation of the effects of foreign direct investment on the skill intensity of host country employment. p. 623-629.4th World Conference on Business, Economics and Management, 26:623-629.

2- Azizmohammadlou H. 2004. The effect of investment on employment in manufacturing subsectors in Iran using VECM. MA thesis, Tehran University. (In Persian).

3- Balali H., and Sadegh K. 2003. The effect of investment on employment and labor demand in Iranian agriculture sector. Agricultural Economics and Development, 11(41-42): 117-135. (In Persian).

4- Baldwin R. E. 1995. The effects of trade and foreign direct investment on employment and relative wages. OECD Jobs Study Working Papers, No. 4, OECD Publishing.

5- Benoit-Smullyan E. 1944. Net investment, consumption and full employment. The American Economic Review, 34(4): 871-874.

6- Bentolila S., Jansen M., Jimenez G., and Ruano S. 2013. When credit dries up: job losses in the great recession. CEPR Discussion Paper 9776.

7- Bernstein E. M. 1939. Wage rates, investment, and employment. The Journal of Political Economy, 47(2): 218-231.

8- Boeri T., Garibaldi P., and Moen E. 2012. The labor market consequences of adverse financial shocks. IZA Discussion Paper 6826.

9- Bruno G., Crinò R., and Falzoni A. 2012. Foreign Direct investment, trade, and skilled labour demand in Eastern Europe. Labour, 26(4): 492-513.

10- Chen K.Y. 1977. Economies of scale and capital-labor substitution in Hong Kong manufacturing. Hong Kong Economic Papers, No. 11, April 1977.

11- Chodorow‐Reich G. 2014. The employment effects of credit market disruptions: Firm level evidence from the 2008‐09 financial crisis. Quarterly Journal of Economics, 129:1–59.

12- Dobrovolsky S. P. 1947. The effect of replacement investment on national income and employment .The Journal of Political Economy, 55(4): 352-358.

13- Duygan‐Bump B., Levkov A., and Montoriol‐Garriga J. 2010. Financing constraints and unemployment: Evidence from the Great Recession. Federal Reserve Bank of Boston Working Paper No. QAU10‐6.

14- Fadaei M., and Kazemi S. 2012. Investigation the effects of fdi in employment in Iran (Autoregressive Model). Economic Growth and Development Research, 3(9): 71-84. (In Persian).

15- Harvey A. C. 1989. Forecasting, structural time series models and the kalman filter. Cambridge: Cambridge University Press.

16- Henderson J. M., Quandt R. E. 1980. Microeconomic theory a mathematical approach. ‎Auckland: MCGraw-Hill.

17- Hodges D.J. 1969. A note on estimation of Cobb-Douglas and CES production function models. Econometrica. 37(4): 721-725.

18- Homayoonifar M. 2001. Technology and employment in agricultural sector. Ph.D Dessertation. Tarbiat Modares University. (In Persian).

19- Kalecki M. 1945. Full employment by stimulating private investment? Oxford Economic Papers, 7: 83-92.

20- Kalman R.E. 1960. A new approach to linear filtering and predictionproblems. Transactions of the ASME-Journal of Basic Engineering, 82(Series D): 35-45.

21- Keykhah A., Alipour F., and Mohammadli H. 2014. Nonlinear relationship between bank credits and employment of agricultural sector in Mazendaren province. International Journal of Management and Agricultural Development, 4(4): 309-312. (In Persian).

22- Keynes J. M. 1936. The general theory of employment, interest and money. London: Macmillan.

23- Kmenta J. 1967. On the estimation of the ces production function. International Economic Review, 8: 180-189.

24- Kurtovic S., and Konzola A. 2016. The effect of foreign direct investment from Austria on skilled and unskilled labor in Bosnia and Herzegovina, Business and Economic Research, 6(1): 210-233.

25- Nelder J. A., and Wedderburn R. W. M. 1972. Generalized linear models. Journal of the Royal Statistical Society, 135: 370-384.

26- Nerlove Q. 1963. Returns to Scale in Electricity Supply. (Measurement in Economics, C. F.Christ, ed. Stanford: Stanford University Press, economics.

27- Pagano M., and Pica G. 2012. Finance and employment. Economic Policy, 27:5–55.

28- Pazhooyan J., and Farzin M.A. 2006. Investigating the Effect of Agricultural Bank credits on investment and employment in agricultural sector. Journal of Peike Nour, 4(2): 15-33. . (In Persian).

29- Ronagh M., and Bakhshoodeh A. 2013. Investigating the effect of credits on employment in agriculture in Fars province. 2013. Agricultural economics (economics and agriculture), 8(1): 83-99. (In Persian).

30- Rousseeuw P.J., and Leroy A. M. 1987. Robust regression and outlier detection. New York: John Wiley & Sons, Inc.

31- Saedi M., and Mousavi M. 2013. Study of factors and policies affecting on labor employment. Economic Research, 13(49): 177-198. (In Persian).

32- Sharpe S. 1994. Financial market imperfections, firm leverage, and the cyclicality of employment. American Economic Review, 84: 1060–1074.

33- Sobhani H., and Azizmohammadlou H. 2005. An analysis to the effect of investment on employment in manufacturing subsectors in Iran. Iranian Journal of Economic Research, 24:1-31. (In Persian).

34- Song H., and Witt S.F. 2000. Tourism demand modeling and forecasting: Modern Econometric Approaches. Oxford: Pergamon. World Development Index (2012). Available at: www.data.worldbank.org.

35- Zellner A., Kmenta J., and Dreze J. 1966. Specification and estimation of Cobb-Douglas production function models. Econometrica, 34(4):784-795.