estimation of Labor demand elasticity of small and medium (SME) industrial firms by Fractional Panel Probit Model

This paper examines the own price and substitution elasticity of the labor force demand for small and medium scale firms in Iran's provinces. In this study, for estimation, the Fractional Panel Probit technique has been employed for the period of time from 2004 to 2014 and at the provincial level. The result of estimation for both groups shows a negative relationship between wage and labor demand that is consistent with labor demand theory. There is a positive effect for output-employment elasticity. The other result shows Cross elasticity of capital price and labor demand reveals a substitution effect in small firms. The demand for labor is reduced by increasing in taxes and value of raw materials. As Iran’s labor market is suffering from labor demand shortage and high unemployment, it is suggested that the economic policymaker should eliminate production barriers, care about increasing production capacity and facilitate the supply of raw materials.