Factor substitution in the Irish manufacturing sector.

In this paper I use a flexible specification of a cost function to estimate the elasticities of demand for skilled labour, unskilled labour and capital in the Irish manufacturing sector for the years 1979 to 2005. An understanding of the magnitude of these elasticites can play an important role in developing approrpariate policies for promoting growth and employment in the economy. The research updates previous work and examines whether recent changes in Ireland relating to Foreign Direct Investment, increased trade and increased inwards migration have altered the input demand elasticities. The main findings of the study are that in most industries in the Irish manufacturing sector, own demand elasticities are less than unity, indicating that an exogenous shock that increases wages and the cost of using physical capital will not be expected to have a large influence on the demand for labour and capital. Of the demands for the three inputs, the demand for capital was the least elastic, while the demand for unskilled labour tended to be the most elastic. In most cases, I find that all inputs are substitutes while there is evidence of relative capital skilled labour complementarity. Based on the results, I also conclude that the changes in the economic performance of the Irish economy beginning of the 1990‟s do not, for the most part, seemed to have changed the elasticity of demand for input. I discuss some potential reasons for this finding and suggest possible avenues for future research