Research Discussion Papers, Bank of Finland
No 10/2001:
Declining labour share – Evidence of a change in underlying production technology?
Antti Ripatti ()
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
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