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The Labour Input Response to Permanent Changes in Output: An Errors‐in‐Variables Analysis Based on Panel Data

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  • Erik Biørn
  • Tor Jakob Klette

Abstract

Using panel data for Norwegian manufacturing, we revisit ‘the increasing returns to scale puzzle’ for labour inputs. We consider the response of the input of white‐collar workers, blue‐collar workers, and blue‐collar worker hours to permanent changes in output. Permanent and temporary changes in output are treated as latent variables. We compare OLS, IV, and GMM estimates of the response elasticities and conclude that the distinction between permanent and temporary changes is essential. Our GMM estimates suggest that the ‘increasing returns to scale puzzle’ remains for all measures of the labour input also when we consider their response to permanent changes in output. For materials, the output response indicates approximately constant returns to scale. This suggests non‐homotheticity of the production technology. JEL classification: C23; J23

Suggested Citation

  • Erik Biørn & Tor Jakob Klette, 1999. "The Labour Input Response to Permanent Changes in Output: An Errors‐in‐Variables Analysis Based on Panel Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 379-404, September.
    • Handle: RePEc:bla:scandj:v:101:y:1999:i:3:p:379-404
    DOI: 10.1111/1467-9442.00162
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    Cited by:

    1. Born Patricia & Lin Hong-Jen & Wen Min-Ming & Yang Charles C., 2009. "The Dynamic Interactions between Risk Management, Capital Management, and Financial Management in the U.S. Property/Liability Insurance Industry," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 4(1), pages 1-21, November.
    2. Yang, Weonho & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Macroeconomic effects of fiscal adjustment: A tale of two approaches," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 31-60.
    3. Meijer, Erik & Spierdijk, Laura & Wansbeek, Tom, 2017. "Consistent estimation of linear panel data models with measurement error," Journal of Econometrics, Elsevier, vol. 200(2), pages 169-180.
    4. Andros Gregoriou, 2013. "Liquidity Constraints and Investment Opportunities: New Evidence from Large and Small Businesses in the UK," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(2), pages 269-279, July.
    5. Sugata Ghosh & Andros Gregoriou & Anirban Mitra, 2013. "On the Role of Democracy in the Ethnicity-Growth Relationship: Theory and Evidence," CEDI Discussion Paper Series 13-02, Centre for Economic Development and Institutions(CEDI), Brunel University.
    6. Erik Biørn, 2002. "Handling the measurement error problem by means of panel data: Moment methods applied on firm data," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B6-1, International Conferences on Panel Data.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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