King, Christopher (2020) Exploring the intensive and extensive margin of employment in a CGE framework. PhD thesis, Victoria University.

Abstract

This research incorporates a model of labour demand into a computable general equilibrium model for Australia. It extends the underlying model by disaggregating the price of labour into (1) ordinary wage costs, (2) payments for overtime hours and (3) fixed costs of labour. It also distinguishes the labour input into hours worked per worker and the number of workers. This research developed a model of labour demand where firms chose between increasing the number of hours worked per worker and paying overtime wage premiums which increase with overtime hours or expanding the size of their workforce and paying fixed costs for each additional worker. A labour services function was adopted to represent the aggregate quantity of labour so that an additional hour per worker had a differing marginal product than an additional worker. A two-stage least squares model of wage premiums and overtime was estimated to represent Australia’s industry-specific overtime regulations based on the set of modern awards and collective bargaining agreements. This provided a relationship between the average wage premium per hour of overtime and the number of overtime hours performed. This was used to calibrate the labour demand model integrated into the CGE framework. The Australian government has a compulsory retirement savings scheme, the superannuation guarantee, which requires employers to set aside a portion of an employees wage income to provide income support in retirement. The effects of increasing the superannuation guarantee from 9.5% to 12% of employees ordinary wage earnings is simulated using the labour demand model developed within this research. It demonstrates how industries respond to the increase in the superannuation guarantee by substituting away from workers to additional hours per worker. The main findings are that industries with (a) higher fixed costs, (b) higher levels of ordinary hours and (c) flatter wage premium schedules comparatively experience larger increases in overtime.

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