Estimation Of Labor Demand Elasticity For The RMSM-LP: Revised Minimum Standard Model For Labor And Poverty Module

Abstract

The RMSM-LP (Revised Minimum Standard Model for Labor and Poverty) is a Microsoft Excel-based simulation package for facilitating the forecasting, monitoring and analysis of financial flows of developing countries developed by the World Bank. It models the demand side of the economy by using an economy wide consistent flow-of-funds framework in which different agents are identified. More precisely, the basic model includes the National Accounts; Balance of payments; general Government; Monetary survey and a rest of the economy account. In addition to the above-mentioned sectors, the model forecasts detailed trade accounts and foreign debt flows and stocks. As such it can be used to produce a comprehensive outlook for a developing economies.

To be able to calibrate RMSM-LP module, we need to provide labor demand elasticity of wage and output for two heterogeneous labor groups (skilled and unskilled). However, in reality, reliable labor data is unavailable or do not have sufficient observations for the efficient estimation of labor demand elasticity for many developing countries. For this reason, (1) we do a literature survey to find acceptable ranges of wage and output elasticity for the labor demand and (2) provide some labor database accessible for economists and (3) provide actual estimates of wage and output elasticity of labor demand using aggregated data of manufacturing and agricultural sector for two regions (Africa and Latin America).

Finally, based on survey and actual estimates, we provide an acceptable range of elasticity for the proper calibration of RMSM-LP module.