Declining labour share – Evidence of a change in underlying production technology?

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Declining labour share – Evidence of a change in underlying production technology?

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Ripatti, Antti () (Bank of Finland Research)
Vilmunen, Jouko () (Bank of Finland Research)

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Antti Ripatti

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.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 10/2001.

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Length: 46 pages
Date of creation: 01 Aug 2001
Date of revision:
Handle: RePEc:hhs:bofrdp:2001_010

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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repec:bep:mactop:v:6:y:2006:i:1:p:1328-1328 is not listed on IDEAS
Simone Bertoli & Francesco Farina, 2007. "The functional distribution of income: a review of the theoretical literature and of the empirical evidence around its recent pattern in European countries," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 005, Department of Economic Policy, Finance and Development (DEPFID), University of Siena. [Downloadable!]
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Other versions:
- Berthold Herrendorf & Arilton Teixeira, 2005. "How Barriers to International Trade Affect TFP," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 866-876, October. [Downloadable!] (restricted)
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- Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor substitution and factor augmenting technical progress in the US - a normalized supply-side system approach," Working Paper Series 367, European Central Bank. [Downloadable!]
Mika Maliranta, 2002. "Factor Income Shares and Micro-Level Restructuring. An Analysis of Finnish Manufacturing," Discussion Papers 796, The Research Institute of the Finnish Economy. [Downloadable!]
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