A Disequilibrium Model of Demand for Factors of Production

Abstract

Production technology and profit maximizing behavior imply that derived demands for factors of production are necessarily interdependent. Yet the literature on employment and investment functions has not fully appreciated or exploited this interdependence: most employment models assume fixed capital stock, while most investment models assume instantaneous adjustment of employment. In fact, factors of production are neither completely fixed nor perfectly variable, and timeadjustment patterns of different inputs are interconnected; thus both input stocks and input rates of utilization are interrelated. If all these interrelationships are properly considered, theoretical and empirical evaluation of input adjustment patterns, factor responses to price and output changes, and the distinctions between shortand long-run behavior all can be investigated in a mutually consistent manner. In our research (see Nadiri and Rosen), we have developed a general model of factor adjustments which incorporates all potential interactions between stocks and utilization rates. Factors of production explicitly treated are employment of both production and nonproduction workers, hours worked per man, capital stock, inventories and a measure of capital utilization. The model is based on neoclassical production theory in the presence of adjustment costs. In this report we sketch the main features of the model, illustrate its usefulness in empirical estimation of factor demands, and present some empirical results.