Nonlinear Relationship between Labor Demand Elasticities and Firm Size in Iran

This paper, at first, examines the determinants of the labor income share (LIS) and second calculates the own, cross, and output elasticities of the labor force demand for three sizes of firms in Iran’s industry: 10-49 employees, 50-99 employees, and more than 100 employees. Since the dependent variable was limited to the interval 0 and 1, a Fractional Panel Probit technique has been used for the period 2004-2014 and provincial level. The findings from the first section of all groups showed that the relation between labor share income and wages, capital prices, and the ratio of skilled to non-skilled employees is positive. Labor income share is reduced by increasing real output, tax, the premium paid, and the value of raw materials. The share of labor income is reduced by increasing production can make sense that the rising in production is more capital-intensive than labor-intensive, and leads to a reduction of the labor income share. In the second part, the own wage elasticity was negative for all groups. The relationship between labor and capital price was positive that implies substitution elasticity between them. There is a positive sign for output-employment elasticity. The nonlinear relationship among the elasticities is consistent with our finding that within all groups, small and large firms have more own and output elasticities. There is a U-shape relationship between firm size and elasticities. In reverse, cross elasticity is high for medium-firm size. Based on research results and since the labor market of Iran is suffering from labor demand shortage, some suggestion to the economic policymaker may be helpful such as applying appropriate facility to increase industrial growth, eliminating production barriers, reducing the risk of investment, and improving human resources skills following the requirements of industrial sectors.