Changes In Factor Prices Research Articles

On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare

This paper employs a multi-country large-scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is “importing” the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1 % in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.

A Simple Model of Inefficient Institutions

AbstractThis paper develops a simple model of economic and political institutions that lead to poor aggregate economic performance. In the model economy, groups with political power, the elite, choose policies to increase their income and to directly or indirectly transfer resources from the rest of society to themselves. The resulting equilibrium is generally inefficient because of three distinct mechanisms: (1) revenue extraction, (2) factor price manipulation and (3) political consolidation. In particular, the elite may pursue inefficient policies to extract revenue from other groups. They may do so to reduce the demand for factors coming from other groups in the economy, thus indirectly benefiting from changes in factor prices. Finally, they may try to impoverish other groups competing for political power. The elite's preferences over inefficient policies translate into inefficient economic institutions. The notable exception to this general picture emerges when long‐term investments are important, thus creating a commitment (holdup) problem, whereby equilibrium taxes and regulations are worse than the elite would like them to be from an ex ante point of view. In this case, economic institutions that provide additional security of property rights to other groups can be useful.

Quality dualism

We suggest a theory of quality dualism, defined in terms of the gap between the highest quality good produced in the informal sector and the lowest quality produced in the formal sector. We develop a model of vertically differentiated products, in which firms producing in the formal and informal sectors face different factor prices, and have a relative advantage in the manufacture of different qualities. We then use the model to examine the cyclical behavior of the respective sizes of the two sectors. Finally, we point out that factor price changes, which reduce or increase the size of the informal sector, may have the same or opposite effect on the degree of dualism in the economy.

Modeling Inefficient Institutions

Why do inefficient %uF818 non-growth enhancing %uF818 institutions emerge and persist? This paper develops a simple framework to provide some answers to this question. Political institutions determine the allocation of political power, and economic institutions determine the framework for policy-making and place constraints on various policies. Groups with political power, the elite, choose policies to increase their income and to directly or indirectly transfer resources from the rest of society to themselves. The baseline model encompasses various distinct sources of inefficient policies, including revenue extraction, factor price manipulation and political consolidation. Namely, the elite may pursue inefficient policies to extract revenue from other groups, to reduce their demand for factors, thus indirectly benefiting from changes in factor prices, and to impoverish other groups competing for political power. The elite%u2019s preference over inefficient policies translates into inefficient economic institutions. Institutions that can restrict inefficient policies will in general not emerge, and the elite may manipulate economic institutions in order to further increase their income or facilitate rent extraction. The exception is when there are commitment (holdup) problems, so that equilibrium taxes and regulations are worse than the elite would like them to be from an ex ante point of view. In this case, economic institutions that provide additional security of property rights to other groups can be useful. The paper concludes by providing a framework for the analysis of institutional change and institutional persistence.

Localized technological change and factor markets: constraints and inducements to innovation

The recent advances in the economics of innovation and the analysis of how composition effects influence the introduction of technological change in a global economy, characterized by the variety of production functions in use and different local factor markets, provide new strength to the induced innovation approach. Developing the localized technological change approach, it is argued that because there are irreversibilities, limited knowledge and local learning, the introduction of new technologies is induced by the disequilibrium conditions brought about in each system by all changes in relative factor prices. The direction of technological change in terms of its specific form of bias and how it is introduced and adopted, however, reflects the specific conditions of local factor markets. Well-defined long-term technological paths emerge in each region and they depend on the selection process in product markets. The more rigid and idiosyncratic, the endowment of production factors and the system of relative prices are, the more specific the technological path of each region is likely to be. The divide between the microeconomic and the macroeconomic models of induced technological change is reconciled.

School Loans, Subsidies, and Economic Growth

This paper examines the effects of government educational subsidies on economic growth and welfare. In an overlapping-generations model with human-capital accumulation, it is shown that, even when human-capital externalities are large, an increase in government subsidies to private-education debt may have a negative effect on the long-run economic growth rate through the general-equilibrium effects of factor-price changes, thereby making future generations worse off. We also show that subsidy policy does not necessarily result in a Pareto improvement even when there are positive effects on growth.

Taxation and growth with overlapping generations

This paper examines the growth effects of wage and interest income taxation in an endogenous growth model, which is characterized by diminishing point-in-time returns in human-capital producing technology and overlapping generations of two-period-lived individuals. We show that the greater the long-term learning time of individuals the more individuals inherit human capital from the previous generation. We demonstrate that a flat-rate wage tax stimulates economic growth, while interest income taxation does not necessarily foster such growth. Intergenerational redistribution induces individuals to change both physical and human capital accumulation, affecting the growth rate through changes in factor prices.

Organizational Change, New Information and Communication Technologies and the Demand for Labor in Services

Between 1993 and 1995, the majority of German firms in services introduced new organizational practices (OC), in particular total quality management systems, certified ISO 9000, lean administration, flatter hierarchies, delegation of authority and ICT-enabled organizational changes). This paper analyzes the impact of organizational change as well as the impact of the introduction of information and communication technology (ICT) on actual labor demand as well as on employment expectations. The focus of attention is also directed to potential endogeneity of OC using treatment effect models as well as multivariate probit models. The empirical results suggest that OC has a positive effect on actual employment growth given output and factor price changes. Furthermore, we find that organizational change has a positive impact on expected employment for all skill groups except for unskilled labor. New ICT and the share of training expenditures are primary forces behind OC. Finally, employment effects are robust to endogeneity of organizational change.

Labor-market adjustment in open economies: Evidence from US states

In this paper we analyze whether regional economic integration across US states conditions local labor-market adjustment. We examine the mechanisms through which states absorb changes in labor supplies and whether industry production techniques are similar across states. There are two main findings. Firstly, states absorb changes in employment primarily through changes in production techniques that are common across states and through changes in the output of traded goods, with the former mechanism playing the larger role. In contrast, state-specific changes in production techniques, which are one indication of state-specific changes in relative factor prices, account for relatively little factor absorption. Secondly, industry production techniques are very similar across states, especially for neighboring states and states with similar relative labor supplies. Both sets of results are consistent with productivity-adjusted FPE across either large states or groupings of related states.

Shifts in Relative U.S. Wages: The Role of Trade, Technology, and Factor Endowments

A basic relationship of the standard general equilibrium trade model relating product-price changes to factor-price changes is used—together with other economic relationships based on this model—to investigate empirically the importance of changes in trade, technology, and factor endowments in accounting for the shifts in relative wages of less-educated workers compared to more-educated workers from 1967 to 1996. In the early part of the period when wage inequality decreased, the dominant explanatory factor seems to have been a relative increase in the supply of highly educated labor. However, since the late 1970s, none of the three economic forces considered can alone account for the observed changes in relative wages, prices, outputs, net exports, and factor-use ratios. In particular, both education-biased technical progress that was greater in industries that intensively used more-educated labor and increased import competition in industries that intensively used less-educated labor seem to have played...

Marginal Intraindustry Trade and Labor Adjustment

In the context of Ethier’s model of the division of labor, this paper accomplishes three tasks. First, it complements existing literature on the algebraic properties of marginal intraindustry trade (MIIT) measures by embedding one of these measures in a general equilbrium model. Consistent with the existing literature, it is found that change in the Grubel–Lloyd index provides systematically different economic information from change in the MIIT index. Second, it examines the connection between intraindustry trade and intra‐ industry adjustment. Here it is found that the informal assumption that intraindustry trade generates only intraindustry adjustment cannot be sustained. That is, intraindustry trade will generally induce interindustry adjustment. Finally, because intraindustry trade generates interindustry adjustment, increased intraindustry trade will generally induce long‐run changes in relative factor prices. This suggests, given the prominence of intraindustry trade in OECD countries, that there may be problems with inference on the link between rade and wages undertaken in a strict Heckscher–Ohlin framework.

The determinants of productivity growth in Dutch manufacturing, 1815-1913

In this article time series on labour productivity in the manufacturing sector are the starting point of the analysis. Using a growth accounting framework (Cobb-Douglas production function) we try to assess to what extent increases in labour productivity are due to rises of total factor productivity or to a growth of capital intensity. The results of this accounting exercise seem to contradict the views expressed by a great number of historians who have written on this subject. By relaxing some of the strong assumptions regarding perfect competition, a new view on the determinants of long-term industrial growth can be developed. The increase in the capital/labour ratio - which undoubtedly has been the engine in the process of industrial growth - cannot be explained exclusively by changes in relative factor prices. Also changes in institutional arrangements as well as demand shocks (resulting in economies of scale) play an important role. By taking imperfect competition (and non-equilibrium prices) into consideration, the puzzling results of the Cobb-Douglas accounting experiment can be reconciled

E-Capital: The Link between the Stock Market and the Labor Market in the 1990s

E-Capital:The Link between the Stock Market and the Labor Market in the 1990s Robert E. Hall Over the past decade, new technologies based on computer software began to transform the production and distribution of goods and to form the basis of new goods in the U.S. economy. The value of the stock market rose tremendously, with many of the largest increases among firms implementing the new technologies. Figure 1 depicts this increase in relation to the replacement cost of the inventories and plant and equipment of corporations. One of the reasons for the upsurge, according to the view developed in this paper, was an increase in the value of installed physical capital thanks to an unexpected rise in the demand for capital. A more important reason was the accumulation of intangibles, demand for which increased even more rapidly. Internet companies are valued almost exclusively for their intangibles: as of November 7, 2000, Yahoo! had a value of $37 billion but only $158 million of physical capital. The workers who develop and use the new technologies are mostly college graduates. Both the number of college-educated workers and their relative earnings rose remarkably in the 1990s. The ratio of dollars paid [End Page 73] to all college graduates for their labor to dollars paid to all other workers rose from 0.61 in 1990 to 0.89 in 1998. Figure 2 shows the increase in constant-dollar earnings per worker by educational attainment from 1990 to 1998. College graduates enjoyed much larger increases than those with less education, except for the lowest education group; people with graduate training saw even greater increases. Click for larger view View full resolution Figure 1. Traditional Measure of Tobin's q for Physical Capital, 1990-99a Despite the evidence from the stock market that corporations have accumulated valuable technological resources apart from their physical capital, and despite the huge increase in demand for college graduates that derives from the new technology, productivity growth rose only a little in the 1990s. The data I use in this paper show a Solow residual, or total factor productivity growth, of 0.9 percent a year from 1990 to 1998. This figure, which is similar to the findings of other recent studies, suggests that the idea of a technological revolution in the United States is overblown. Skeptics of the importance of new technology tend to view the high stock market valuation of U.S. corporations as an irrational bubble and note that it is unsupported by comparable improvement in current productivity or profit. This paper pursues the argument that I have developed elsewhere that today's high stock market valuations should be taken seriously as a measure [End Page 74] of the resources owned by corporations.1 I introduce a new kind of capital—e-capital—to characterize these resources. I view the production of goods and services as employing the services of e-capital along with machines, college-graduate workers (c-workers), and workers who have not graduated from college (h-workers). The technology for making e-capital is simple: c-workers by themselves make e-capital. No other factors are required. I use the standard tools of production economics to understand changes in factor intensities and factor prices, without invoking significant changes over time in the production function for goods and services. Click for larger view View full resolution Figure 2. Increases in Average Annual Real Earnings from 1990 to 1998 by Level of Educationa A firm's e-capital is a body of technical and organizational know-how. Much e-capital involves the use of computers and software, but it is the business methods based on computers, not the computers themselves, that constitute e-capital. Computers count as ordinary plant and equipment. E-capital-intensive firms handle huge flows of transactions accurately [End Page 75] and quickly. They employ far fewer expensive workers as problem solvers than do traditional firms, because they have developed systems to get things right the first time. Industries with high levels of e-capital relative to employment include insurance, securities brokers, communications, and equipment manufacturing. For example, online brokers such as E*Trade prosper by substituting...

Comments and Discussion

E-Capital: The Link between the Stock Market and the Labor Market in the 1990s Robert E. Hall Over the past decade, new technologies based on computer software began to transform the production and distribution of goods and to form the basis of new goods in the U.S. economy. The value of the stock market rose tremendously, with many of the largest increases among firms implementing the new technologies. Figure 1 depicts this increase in relation to the replacement cost of the inventories and plant and equipment of corporations. One of the reasons for the upsurge, according to the view developed in this paper, was an increase in the value of installed physical capital thanks to an unexpected rise in the demand for capital. A more important reason was the accumulation of intangibles, demand for which increased even more rapidly. Internet companies are valued almost exclusively for their intangibles: as of November 7, 2000, Yahoo! had a value of $37 billion but only $158 million of physical capital. The workers who develop and use the new technologies are mostly college graduates. Both the number of college-educated workers and their relative earnings rose remarkably in the 1990s. The ratio of dollars paid [End Page 73] to all college graduates for their labor to dollars paid to all other workers rose from 0.61 in 1990 to 0.89 in 1998. Figure 2 shows the increase in constant-dollar earnings per worker by educational attainment from 1990 to 1998. College graduates enjoyed much larger increases than those with less education, except for the lowest education group; people with graduate training saw even greater increases. Click for larger view View full resolution Figure 1. Traditional Measure of Tobin’s q for Physical Capital, 1990–99a Source: Author’s calculations based on data from Hall (2000). a. Ratio of market value of nonfarm, nonfinancial corporations to replacement cost of their physical capital and inventories. Despite the evidence from the stock market that corporations have accumulated valuable technological resources apart from their physical capital, and despite the huge increase in demand for college graduates that derives from the new technology, productivity growth rose only a little in the 1990s. The data I use in this paper show a Solow residual, or total factor productivity growth, of 0.9 percent a year from 1990 to 1998. This figure, which is similar to the findings of other recent studies, suggests that the idea of a technological revolution in the United States is overblown. Skeptics of the importance of new technology tend to view the high stock market valuation of U.S. corporations as an irrational bubble and note that it is unsupported by comparable improvement in current productivity or profit. This paper pursues the argument that I have developed elsewhere that today’s high stock market valuations should be taken seriously as a measure [End Page 74] of the resources owned by corporations.1 I introduce a new kind of capital—e-capital—to characterize these resources. I view the production of goods and services as employing the services of e-capital along with machines, college-graduate workers (c-workers), and workers who have not graduated from college (h-workers). The technology for making e-capital is simple: c-workers by themselves make e-capital. No other factors are required. I use the standard tools of production economics to understand changes in factor intensities and factor prices, without invoking significant changes over time in the production function for goods and services. Click for larger view View full resolution Figure 2. Increases in Average Annual Real Earnings from 1990 to 1998 by Level of Educationa Source: Author’s calculations based on data from Bureau of the Census, Current Population Survey. a. Adjusted for inflation by the implicit deflator for private GDP. A firm’s e-capital is a body of technical and organizational know-how. Much e-capital involves the use of computers and software, but it is the business methods based on computers, not the computers themselves, that constitute e-capital. Computers count as ordinary plant and equipment. E-capital-intensive firms handle huge flows of transactions accurately [End Page 75] and...

Taxing virgin materials: an approach to waste problems

Extraction of virgin materials will eventually end up as waste in the form of emissions to land, air and water. Thus, the effect on material use is a more informative indicator of the outcome of waste policies than the impacts on the amounts recycled and sent to end treatment. Among the major causes of inefficiencies related to waste are biased tax policies and regulations, which comprise indirect subsidization of virgin materials. Heavier taxation of virgin materials and less taxation of labour contribute to changes in relative factor prices which better reflect the social value of the resources, without increasing the overall costs. This analysis based on a general equilibrium modelling approach illustrates the effects of such a reform on environmental and economic measures, and shows that there is a considerable potential of net benefits, not only from less use of virgin materials, but also from a general reduction in air emissions.

Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long-Run Supply, 1926-1942

Modem treatment of long-run (U-shaped) cost curves developed from reactions to Sraffa's criticisms of Marshall. He argued that internal (dis)economies were incompatible with partialequilibrium analysis under perfect competition. Pigou concurred and drew L-shaped cost curves; Viner realized that this made firm size indeterminate and industry output volatile. Using Austin and Joan Robinson's analyses, Stigler justified rising costs/supply, determinacy, and stability by irrational entrepreneurs enduring coordination failure and by factor price changes. We conclude that consistency requires constant costs but firm employment, output, and factor incomes remain theoretically indeterminate. It becomes likely that large firms will undermine perfect competition.

Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long‐Run Supply, 1926‐1942

Modern treatment of long‐run (U‐shaped) cost curves developed from reactions to Sraffa's criticisms of Marshall. He argued that internal (dis)economies were incompatible with partial‐equilibrium analysis under perfect competition. Pigou concurred and drew L‐shaped cost curves; Viner realized that this made firm size indeterminate and industry output volatile. Using Austin and Joan Robinson's analyses, Stigler justified rising costs/supply, determinacy, and stability by irrational entrepreneurs enduring coordination failure and by factor price changes. We conclude that consistency requires constant costs but firm employment, output, and factor incomes remain theoretically indeterminate. It becomes likely that large firms will undermine perfect competition.

Decomposition of Technological Change and Factor Bias in Indian Power Sector: An Unbalanced Panel Data Approach

Technological change and factor bias in the Indian power sector are analyzed using a translog cost function. Various components of technological progress and factor bias are identified and estimated, using a 21 year unbalanced panel data of Indian states and union territories. Heterogeneity across states is incorporated in the model using a variance component model. Appropriate corrections are made for unbalanced panel data. Empirical results show that the annual average rate of technological progress has been 2.4% for the country as a whole. Accumulation of knowledge and increasing scale are found to be the major factors contributing to technological progress. In contrast, the effects of factor price changes and fixed capital accumulation on technological progress have been unfavorable. Pure factor bias measure indicate saving in the use of fuel and labor, and increased use of materials. Tests are performed to check the curvature properties of the underlying technology.

Energy conservation in electricity generation: A case study of the electricity and water industry in Kuwait

This paper has examined possibilities of energy conservation in the generation of electricity and water in Kuwait. This has been done through analysing the underlying production structure by employing a translog flexible cost function and using series data. The results show that, in the absence of changes in factor prices, fuel intensity of electricity and water is expected to increase with increase in output. Furthermore, capital and fuel are found to be substitutes. Overall, the evidence suggests that energy conservation can be achieved by using fuel prices as instruments. This is likely to induce demand for new capital and hence promote productivity gains.

Labor productivity measurement in Japanese agriculture, 1956–1990

Abstract This paper investigates the factors responsible for a drastic decline in the growth rate of labor productivity of the agricultural sector for the 1956–1990 period. This investigation is carried out by a newly devised procedure which decomposes the growth rate of labor productivity into (1) the total substitution effect which consists of the effects due to factor price changes and biased technological change, and (2) the TFP effect composed of the effects due to scale economies and technological progress. Based on empirical estimation of the translog cost function, it was found that the total substitution effect contributed to the growth of labor productivity much more than the TFP effect did for the period under question.