Labour Demand Elasticities in Manufacturing Sector in Kenya
Anthony Wambugu

Abstract
Job creation and reduction of poverty are often goals of policy reforms that involve removal of input price distortions and acceleration ofoutput growth. Whether such reforms create jobs depends on the degree of responsiveness of labour demand to changes in wages and output. This study estimates labour demand functions using panel data for Kenya manufacturing firms. The estimated elasticities revealed, as expected, that higher wages reduce employment and higher value-added increases employment. The estimate of own-wage elasticity is around -0.20 and the output elasticity is around 0.10.The estimates of elasticities are robust to the inclusion of firm-characteristics and firm fixed effects in the labour demand equation. The estimates imply that a 10% increase in wages reduces employment by 2%, while an increase of a similar magnitude in value added increases employment by 1%. Kenyan policy makers can use these results when considering policies that increase manufacturing industry labor costs and value-added.

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