The returns to scale effect in labour productivity growth
AbstractLabour productivity is defined as output per unit of labour input. Economists acknowledge that technical progress as well as growth in capital inputs increases labour productivity. However, little attention has been paid to the fact that changes in labour input alone could also impact labour productivity. Since this effect disappears for the constant returns to scale short-run production frontier, we call it the returns to scale effect. We decompose the growth in labour productivity into two components: 1) the joint effect of technical progress and capital input growth, and 2) the returns to scale effect. We propose theoretical measures for these two components and show that they coincide with the index number formulae consisting of prices and quantities of inputs and outputs. We then apply the results of our decomposition to U.S. industry data for 1987–2007. It is acknowledged that labour productivity in the services industries grows much more slowly than in the goods industries. We conclude that the returns to scale effect can explain a large part of the gap in labour productivity growth between the two industry groups.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 31152.
Date of creation: 27 May 2011
Date of revision:
Labour productivity; index numbers; Malmquist index; Törnqvist index; output distance function; input distance function;
Find related papers by JEL classification:
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- O51 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
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