Research Discussion Papers, Bank of Finland
Declining labour share – Evidence of a change in underlying production technology?
() and Jouko Vilmunen
Abstract: The study demonstrates that the decline in the labour
share in Finland can not be explained by the Cobb-Douglas production
function. Instead, we propose an approach based on the
constant-elasticity-of-substitution (CES) production function with labour-
and capital-augmenting technical progress. The model is augmented by
imperfect competition in the output market. According to the empirical
results based on estimation of the first-order-conditions, the technical
elasticity of substitution is significantly less than unity (0.6) and hence
the Cobb-Douglas production function is rejected. The growth rate of the
estimated labour-augmenting technical progress has decreased in recent
years, which is not consistent with the ‘new-economy’ hypothesis.
Capital-augmenting technical trend has exploded during the same period,
which provides a possible explanation for the rapid growth of the Solow
residual. The main contributing factor behind the declining labour share
is, however, the increasing mark-up.
Keywords: production function; elasticity of technical substitution; input-augmenting technical progress; new economy; (follow links to similar papers)
46 pages, August 1, 2001
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom