The neoclassical employment model applied to Ghanaian manufacturing

Abstract

The neoclassical framework is applied to analyze employment generating policies for Ghanaian industry. Elasticities of substitution clustering around 1.0 were found for five industries. However, as guides to employment policy, such econometric measurements of the CES function measure the wrong concept of elasticity, may contain serious upward biases, and miss some important features of LDC industry. Although these shortcomings suggest less scope for intra‐industry labour‐capital substitution, changes in output mix promise sufficient additional substitutability to justify neo classical policy prescriptions. Ghana's recent experience indicates the feasibility of reducing the wage‐rental ratio significantly. If part of the change is borne by lower real wages, then under Ghanaian conditions a 25 per cent fall in the wage‐rental ratio could, over 5 years, create 30 per cent more jobs in manufacturing than if no change occurs.

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