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Profits, R&D and labour: Breaking the law of diminishing returns to labour

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Abstract

A basic assumption in the economic literature is the one of diminishing marginal returns to labour. However, theoretical studies on knowledge and labour specialization assume that an increase in the knowledge investment embodied in the human capital of workers raises the marginal product of labour. In this paper, we propose a structural approach to test the hypothesis of non-diminishing returns to labour for a panel data set of R&D investing companies, and we explore how the marginal returns to labour vary with their level of knowledge capital (R&D) intensity. Our econometric analysis provides a number of results. First, we find that more knowledge intensive firms have non-diminishing returns to labour, while less knowledge intensive companies exhibit diminishing returns. Second, independently from the knowledge capital intensity, returns to labour increase with size. Relatively smaller firms have diminishing returns, while larger companies have non-diminishing to increasing returns to labour. However, we show that more knowledge intensive firms can attain the threshold of non-diminishing returns faster than their counterparts.

Suggested Citation

  • Sara Amoroso, 2015. "Profits, R&D and labour: Breaking the law of diminishing returns to labour," JRC Working Papers on Corporate R&D and Innovation 2015-10, Joint Research Centre (Seville site).
  • Handle: RePEc:ipt:wpaper:201510
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    Cited by:

    1. Romeo-Victor Ionescu, 2016. "Research, Innovation and Development vs Regional Disparities across the European Union," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(2), pages 161-173, April.
    2. Sara Amoroso, 2015. "Profits, R&D and labour: Breaking the law of diminishing returns to labour," JRC Working Papers on Corporate R&D and Innovation 2015-10, Joint Research Centre (Seville site).
    3. repec:dug:journl:y:2016:i:2:p:161-173 is not listed on IDEAS

    More about this item

    Keywords

    size; specialization; profitability; profit function;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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