Labor-Productivity Changes in Regional Econometric +Input−Output Models

Abstract

In 1988 Moghadam and Ballard first introduced the interindustry demand variable (IDV) as an innovative approach to integrate regional econometric and input—output models. Since then, several extensions of the IDV have been suggested in the literature, including adjustments for labor-productivity differentials across sectors to generate an interindustry employment demand variable (IEDV). In this paper we revisit the IEDV variable, and offer extensions that transform it from a static to a dynamic form. We implement the range of these specifications for the San Diego labor market, and evaluate their estimation properties and forecasting performance in the context of simulation and projection analyses. The results suggest that problems of multicollinearity plague the conventional specification, and have obscured the assessment of the value of adjustments for industry productivities and the nature of productivity specification. Based on an alternative specification, we find that dynamic labor-productivity adjustments lead to lower simulation errors. These adjustments also result in significantly lower impact multipliers relative to those from the IDV model.