In Discussion Paper No. 1279, Fatemeh Shadman-Mehta and Research Associate Henri Sneesens set out to evaluate the relative importance of the various factors likely to have influenced the demand for skilled and unskilled labour in France, over the period 1962-89. The authors do not equate skill with non-manual work, but use instead a classification that corresponds better to the skill criterion. Four factors are used in production: unskilled labour, skilled labour, energy and fixed capital. Firms choose the production technology that minimizes costs. The authors thus obtain and estimate a system of three equations, with a dynamic formulation of the error correction type, in which the demand for each factor per unit of output is expressed in terms of real costs of the four factors, allowance also being made for exogenous technical progress. The approach is macroeconomic, and essentially deals with technology choice, that is factor productivity over the long run. The main aim is to estimate price elasticities, and direct and cross partial elasticities of substitution between different factors, especially those related to skilled and unskilled labour.

One interesting conclusion from the theoretical model is that when the partial elasticities of substitution between skilled labour and energy and/or capital are not identical to those for unskilled labour, then the same change in relative skilled/unskilled wages has different consequences on the relative demand for skilled/unskilled labour demand, according to which category of wages is responsible for the change.