9. Labor supply - number of workers

The focus now shifts to supply side shocks. Section 9-13 demonstrate the properties of ADAM to supply side shocks. Labor input in ADAM's production function is defined in terms of efficiency corrected labor hours, i.e. as a product of three elements: labor productivity, annual working hours per employed and employment. A change in any of these three components changes the labor input, and the experiments in section 9 - 11 present a shock to each of these three elements. In all cases, production increases in the medium and long run. In this section, labor supply is increased by increasing the number of workers. Each of the following seven experiments (section 9 - 15) also include a sub-section where each multiplier exercise is repeated with a balanced public budget.


As mentioned in the introduction, the export relations in the current model version include the possibility of including supply effects. Expansion in labor force and productivity boosts production capacity, making it possible to produce different varieties of a product. This leads to higher foreign demand shifting the demand curve outward and making it possible to sell higher exports without reducing prices. The positive response of exports to domestic output growth amplifies the effect on output and employment, because exports can expand without a need for declining terms of trade. Thus, the next six experiments (section 9-14) also have versions of the experiment where supply effects on exports are incorporated.


hmtoggle_arrow1A. Number of workers
hmtoggle_arrow1B. Number of workers - including supply effects on exports
hmtoggle_arrow1C. Number of workers - balanced budget


This section illustrates the effect of introducing a budget constraint to the labor supply shock in section A and B. Spending the supply-driven improvement in public finances on fiscal easing makes employment increase faster, and the long-run need for higher exports and improved competitiveness is also lower in section C. In section A and B, the additional labor supply was used to boost public savings and net exports. In section C, it is primarily used to increase domestic consumption. Making the public sector spend its additional revenues resembles an introduction of Say’s law.


In a closed economy, spending the full-structural-employment GDP on consumption and investment would be enough to secure full structural employment. However, in an open economy a share of domestic demand will be met by higher imports, and exports will have to increase accordingly. Consequently, we still get an export increase in section C, but as we have seen, the export increase is smaller than in section A and especially in section B. In real terms, the long-run increase of exports in ADAM will always match full-structural-employment GDP plus imports minus domestic demand. And in section C, the increase of exports will also match the increase of imports in nominal terms, because the constant public budget plus the private consumption function makes the impact on domestic demand match the impact on GDP in nominal terms.