Business Intelligence

The Returns To Scale Effect In Labour Productivity Growth

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Executive Summary

Labour 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, the authors call it the returns to scale effect. They decompose the growth in labour productivity into two components: The joint effect of technical progress and capital input growth, and the returns to scale effect. They 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.

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