The employment-hours trade-off: theory and an application to the Portuguese case

Using traditional production theory, it is possible to estimate production functions in which hours per worker and number of workers hired are treated as endogenous and chosen by the firm, priced respectively by the variable hourly wage and the so-called quasi-fixed unit cost. The available data suggested the use of Cobb-Douglas or CES specifications or the use of two-stage separable technologies, with a second-level Cobb-Douglas being possible. Quasi-fixed costs were associated with legal social security payments, which were also conditioned by the data. The estimates for the Portuguese metal products and engineering industries - using cross-section evidence for 1987 - showed that disaggregation of the labor input is empirically justifiable, and total man-hours employed and the numbers of workers hired are complements in production. Hours per worker respond negatively to the variable hourly wage and positively to the quasi-fixed unit cost. Nevertheless, in our framework, this would be so by construction. Total labor costs increase with both the hourly wage and the quasi-fixed unit costs.