Specification Bias and Short-Run Returns to Labour: Some Evidence for the United Kingdom

Abstract

IN recent years, there have been many attempts to estimate short-run returns to labour from aggregate time series studies, which utilize either a production function or an employment function approach.' As the production or employment function is shortrun, capital stock is assumed to be fixed exogenously and it is most simply approximated by a time trend. Thus, using Q, for actual output and (Eh)t for man-hours employed in period t, the production function specification 2 can be written