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

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Author Info

  • Ripatti, Antti

    ()
    (Bank of Finland Research)

  • Vilmunen, Jouko

    ()
    (Bank of Finland Research)

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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Bibliographic Info

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.suomenpankki.fi/en/
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Related research

Keywords: production function; elasticity of technical substitution; input-augmenting technical progress; new economy;

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Cited by:
  1. Marja-Liisa Halko, 2004. "Buffer funding of unemployment insurance in a dynamic labour union model," Macroeconomics, EconWPA 0404030, EconWPA.
  2. Joanna Tyrowicz, 2009. "When Eastern Labour Markets Enter Western Europe CEECs. Labour Market Institutions upon Euro Zone Accession," Working Papers 2009-03, Faculty of Economic Sciences, University of Warsaw.
  3. Herrendorf, Berthold & Teixeira, Arilton, 2002. "How Trade Policy Affects Technology Adoption and Productivity," CEPR Discussion Papers 3486, C.E.P.R. Discussion Papers.
  4. Halko, Marja-Liisa, 2003. "Buffer funding of unemployment insurance in a dynamic labour union model," Research Discussion Papers 24/2003, Bank of Finland.
  5. Alho, Kari, 2002. "The Equilibrium Rate of Unemployment and Policies to Lower It: The Case of Finland," Discussion Papers, The Research Institute of the Finnish Economy 839, The Research Institute of the Finnish Economy.
  6. Sánchez, Marcelo, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank.
  7. 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.
  8. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers c009_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  9. Klump, Rainer, 2003. "Inflation, factor substitution and growth," Working Paper Series 0280, European Central Bank.
  10. Maliranta, Mika, . "Micro Level Dynamics of Productivity Growth. An Empirical Analysis of the Great Leap in Finnish Manufacturing Productivity in 1975-2000," ETLA A, The Research Institute of the Finnish Economy, number 38.
  11. Anastasia Guscina, 2006. "Effects of Globalizationon Labor's Share in National Income," IMF Working Papers 06/294, International Monetary Fund.
  12. Juha Kilponen & Helvi Kinnunen & Antti Ripatti, 2006. "Demographic Uncertainty and Labour Market Imperfections in Small Open Economy," Computing in Economics and Finance 2006 227, Society for Computational Economics.
  13. 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.
  14. Małgorzata Gawrycka & Aneta Sobiechowska-Ziegert & Anna Szymczak, 2012. "The Impact of Technological and Structural Changes in the National Economy on the Labour-Capital Relations," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 6(1), March.
  15. Jacques-Bernard Sauner-Leroy, 2003. "The impact of the implementation of the Single Market Programme on productive efficiency and on mark-ups in the European Union manufacturing industry," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 192, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  16. Maliranta, Mika, 2002. "Factor Income Shares and Micro-Level Restructuring. An Analysis of Finnish Manufacturing," Discussion Papers, The Research Institute of the Finnish Economy 796, The Research Institute of the Finnish Economy.

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