Higher Capital-labor Ratio Research Articles

Tax wedges, financial frictions and misallocation

We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of their wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporations to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted access to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.

Does Trade Openness Transfer Pollution across Borders: An Experience of Pakistan

The study aims to empirically explore the link between trade openness and emission level in Pakistan by using Johansson co integration technique during the period from1972 to 2019. The empirical strategy of the study progressively incorporates models from zero interaction terms to complete interaction terms for analyzing the relationship between trade openness and emission level in the presence of scale, composition and technique effect. The variable of the trade openness appeared in all the models with negative sign except in scale effect model. It means technique effect outweighs the composition and scale effect in Pakistan which ultimately makes decreasing impact of trade on pollution. The scale effect results in higher emissions in Pakistan. Similarly, composition effect also bears positive sign showing that higher capital labor ratio in Pakistan will increase pollution because capital goods are said to be pollution intensive goods.

Globalization and taxation: Theory and evidence

We construct a theoretical model to capture the compensation and efficiency effects of globalization in a set up where the redistributive tax rate is chosen by the median voter. The model predicts that the two alternative modes of globalization- trade liberalization and financial openness- could potentially have different effects on taxation. We then provide some empirical evidence on the relationship between taxation and the alternative modes of globalization using a large cross-country panel data set. On average, globalization is associated with lower taxation but there is some evidence that in countries with high capital-labor ratio, globalization is associated with increased taxation. We make a distinction between de jure and de facto measures of globalization and find a strong negative relationship between taxation and de jure measures of globalization. The results for de facto measures of globalization are mixed.

Globalization and Taxation: Theory and Evidence

We construct a theoretical model to capture the compensation and efficiency effects of globalization in a set up where the redistributive tax rate is chosen by the median voter. The model predicts that the two alternative modes of globalization- trade liberalization and financial openness- could potentially have different effects on taxation. We then provide some empirical evidence on the relationship between taxation and the alternative modes of globalization using a large cross-country panel data set. On average, globalization is associated with lower taxation but there is some evidence that in countries with high capital-labor ratio, globalization is associated with increased taxation. We make a distinction between de jure and de facto measures of globalization and find a strong negative relationship between taxation and de jure measures of globalization. The results for de facto measures of globalization are mixed.

Changes in Energy Intensity in Canada

Canada is one of the top energy users and CO2 emitters among the OECD countries. However, energy intensity has been declining, on average, by about 1.4 percent since 1980. In this paper, we use the Fisher Ideal Index to determine the contribution of changes in the composition of economic activities and efficiency to a decline in energy intensity in Canada at national, provincial, and industry levels. We also apply panel data estimation methods to further investigate the factors driving energy intensity, efficiency and activity indexes for the period 1981-2008. We test for endogeneity as well as cross-section dependency in the provincial data and control for factors such as climate, policy, and energy endowment. The national and provincial decomposition results suggest that most of the reduction in energy intensity has occurred mainly due to improvements in energy efficiency rather than shifts in economic activities. Within the industry, while energy intensity has declined significantly in manufacturing, it has remained stable in transportation, utilities, and construction, and increased significantly in oil extraction and mining industries. The provincial panel regression results indicate that energy intensity is higher in provinces with higher average incomes, faster population growth, colder climate, and a higher capital-labour ratio, and lower in provinces with higher energy prices and higher investment. The industry panel regression results show that investment has contributed to energy efficiency in utilities and mining and to a shift away from energy-intensive activities in manufacturing and transportation industries. Technological advances have been most effective in increasing energy efficiency in construction and utilities and in decreasing energy-intensive activities in manufacturing industries. The results indicate that although efficiency contributes to a reduction in energy intensity in Canada, increasing activity in energy-intensive industries, such as oil and mining, partially offsets the efficiency gains in other industries.

CLUB CONVERGENCE ACROSS INDIAN STATES: AN EMPIRICAL ANALYSIS

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONCo-existence of extreme economic affluence and significant poverty is main paradox of the modern world. This holds true for both across and within nation. It has given birth to a prominent theme of economic convergence in the existing literature. Convergence is defined as a long run tendency of poor economies to grow faster than the rich counterparts over time to equalize the per capita income (Solow, 1956; Swan, 1956). Not surprising, there emerged various theoretical developments on economic growth and convergence of economies over the years with varied explanations. Such as, Solow (1956) and Swan (1956) provide a fundamental base for convergence hypothesis, albeit indirectly. Mankiw et al. (1992), in their seminal work, offers an empirical validation of Solow's model and extended it by including human capital to investigate the convergence hypothesis. These deployments raises an important question that whether deconomies with lower capital labor ratio grows faster than the economies with higher capital labor ratio. Or in simple way, does there exists convergence across economies? (Barro and Sala-i-Martin, 2004).To answer this essential question there stands a plethora of literature using different version of the same. The issue has been debated in economic growth literature since long time and has been dealt empirically by numerous studies. Barro and Sala-i-Martin (1991), in their notable work tested convergence hypothesis and found evidences of convergence for the states of United States. Similar attempts were made in Barro and Martin (1995), Sala-i-Martin (1996), Martin and Sanz (2003).1 Later on the literature extended in using time series and panel data models (Crown and wheat, 1995; Bernard and Jones, 1996a, b; Carlno and Mills, 1993, 1994; Vohra, 1996) however, they lack unanimity among their findings. This provides an incentive to the researchers to adopt advanced and more appropriate approaches to deal with convergence hypothesis comprehensively for exploring new insights in this field.On the other hand there is a growing literature on examination and identification of the convergence clubs with the help of various methodologies.2 Studies like Quah (1993a, b; 1997), Friedman (1992) detected Galton's fallacy3 in convergence criteria used by earlier studies. Quah in a series of papers proposed an intra-distributional approach 4 to examine the dynamic convergence through twin peaks process. The method uses log differential of the interested variable in a stochastic kernels process to find out the clubs of converging regions in absolute as well as conditional to the other influencing variables. The empirical investigation of this approach by Carlno and Mills (1996) and Bernard and Durlauf (1995, 1996) supports the evidence of convergence hypothesis. There are some studies that made use of different methodology to identify club convergence, such as, regression tree approach (Durlauf and Johnson, 1995), pair wise approach (Pesaran, 2007), nonlinear log test approach (Philips and Sul, 2007) to name important ones and is still in debate.As far as India is concerned, its growth pattern has shown a significant variation over time. It lacks a primeval and very important concomitant of equitable disbursement over the states. Several attempts were made to understand the convergence behaviour of Indian states. Such as Cashin and Sahay (1996), tested the hypothesis of convergence on 20 Indian states between the period of 1961 and 1991 and found no significant signs of convergence. Similar results were reported by Bajpai and Sachs (1996). Whereas the studies of Marjit and Mitra (1996), Rao et al. (1999) and Aiyar (2001) found divergent behavior of Indian states. Further, Nagaraj et al. (2000) found evidence of conditional convergence for 17 states over the period of 1960-94. Trivedi (2002), Singh and Srinivasan (2002) found weak converging behavior across Indian states for 1990 to1998. …

Firms' Innovation, Public Financial Support, and Total Factor Productivity: The Case of Manufactures in Peru

AbstractBased upon an adjusted Crepon–Duguet–Mairesse (CDM) model, this paper analyzes the relationship between investment intensity, public financial support, innovation, and total factor productivity (TFP) for a sample of manufacturing firms of Peru with data obtained from the 2004 survey of science, technology, and innovation (STI) activities. The estimation of the model indicates that large firms are more likely to invest in STI activities and firms' size increases the probability of producing technological inovation (TI) and non‐technological innovation (NTI). STI firms' investment intensity and public financial support have also helped manufacturing firms to increase the probability of producing TI outcomes. Further, such support may have increased firms' investment on STI activities. The innovation effects on TFP, however, were statistically not clear or robust. Thus, whereas investment intensity did increase firms' TPF in low‐tech manufacturing firms, this is not the case for high‐tech firms. For this group of firms, relatively high capital–labor ratio and the availability of a high level of human capital seem to promote higher levels of TFP.

The determinants of energy intensity for the design of environmental strategies in the Mauritian textile sector

The paper analyses the forces which influence energy intensity in the textile and clothing sector for environmental and energy policy in Mauritius. Using the stochastic frontier analysis, the study finds that energy intensity is statistically lower for export-oriented enterprises, most likely, because of the competitive environment. Foreign ownership also reduces energy per output. However, higher capital-labour ratio and new investments are found to increase energy intensity and a U-shape relationship is found between firm size and energy intensity. It is also found that export-driven firms are relatively more technically efficient in relation to energy usage. The study concludes that there may be synergies between the twin objectives of economic competitiveness and sustainable production patterns and that eco-efficiency may be a critical success factor to survive in a highly competitive market. Environmental strategies which may benefit the Mauritian textile sector include access to clean production tec...

FINANCIAL INFRASTRUCTURE, TECHNOLOGICAL SHIFT, AND INEQUALITY IN ECONOMIC DEVELOPMENT

This paper presents an overlapping generations model with technology choice and imperfect financial markets, and examines the evolution of the income distribution in economic development. The model shows that improvements in financial infrastructure facilitate economic development both by raising the aggregate capital–labor ratio and by causing a technological shift to more capital-intensive technologies. Although a higher capital–labor ratio under a given technology reduces inequality, a technological shift can lead to a concentration of economic rents among a smaller number of agents. We derive the condition under which an improvement in financial infrastructure actually decreases the average utility of agents.

Dealing with global ageing and declining world interest rates: Fiscal costs and pension reform in small open economies

How will the worldwide decline in real interest rates associated with global ageing affect small open economies (SOEs) with ageing populations? Lower interest rates will result in higher capital–labor ratios and increased wages. Higher wages will be passed on to pension benefits, exacerbating ageing-related fiscal pressures, increasing taxation and reducing consumption and welfare. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. The article illustrates the interest rates transmission mechanism and its interaction with pension indexation. In addition, the article evaluates the capacity of pension reforms to mitigate the effects of long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, protect SOEs against world interest rate changes. These results serve to strengthen policymakers’ case for indexation-switching pension reforms.

Tough Love: Do Czech Suppliers Learn from Their Relationships with Multinationals?

Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. While the empirical studies have cast doubt on the existence of horizontal spillovers from FDI in developing countries, several recent papers have confirmed the presence of vertical spillovers, which take place through contacts between foreign affiliates and their local suppliers. However, the existing studies rely on industry-level proxies for vertical spillovers rather than information on actual relationships between local companies and multinationals. This study goes one step further by employing a unique dataset from the Czech Republic, which allows us to identify local firms supplying multinationals operating in the country. The data suggest that suppliers are different from other firms. They are larger, have a higher capital-labor ratio, pay higher wages and exhibit a higher productivity level. The evidence is suggestive of both high productivity firms having a higher probability of supplying multinationals as well as suppliers learning from their relationships with multinationals.

Capital Income Taxation with Work Incentives

This paper uses a life-cycle model of heterogeneous agents to study a capital income tax that rewards hard work. We propose a simple mechanism of capital taxation which is negatively correlated with labor supply. It provides a strong work incentive when households possess large assets and high productivity later in the life-cycle, when they otherwise would reduce labor supply. With the ex-post higher after-tax return from assets, the system also adds to the saving motive and all the aggregate variables including capital, labor and consumption will rise. The higher capital-labor ratio increases the wage rate, which benefits households with fewer assets. The increased economic activities expands the tax base and the revenue neutral reform results in the lower average tax rate. The system improves long-run welfare and the majority of current generations would support a transition to the reformed system.

Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Global Aging and Declining World Interest Rates: Macroeconomic Insurance through Pension Reform in Cyprus

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Real Minimum Wage and Growth Theory: Simulations and Some Policy Results

A Solow type two‐sector growth model is used to examine several issues related to growth and unemployment in a minimum wage economy. By simulating the model, we demonstrate that given the same percentage increase in wage rate, an economy with a higher capital–labor ratio is more likely to decay. More importantly, a tariff policy reduces the unemployment periods by 92% provided that the current capital–labor ratio is one‐sixth of that of the steady state capital–labor ratio. We assume that the first best policy of uniform wage subsidy is not politically feasible.

New capital accumulation in transition economies: implications for capital-labor and capital-output ratios

This paper investigates the impact of new capital accumulation on capital-labor and capital-output ratios in 26 transition economies (TE) of Central and Eastern Europe and former USSR. Using a perpetual inventory method, we estimate the amount of capital accumulated in these countries since the start of market reforms and compare it to results for developed countries and largest emerging market economies. We found that on per worker basis, capital accumulation in TE is lagging far behind that of their mature market neighbors in European Union. Disparities in capital-output ratios were not as pronounced, as higher capital-labor ratios were reached in economies with higher levels of GDP per capita. Regression analysis indicates that capital per worker was accumulated faster in TE having higher saving rates, relatively higher priced labor, closer proximity to Western Europe, and higher manufacturing share in the economy. The K/Y levels were influenced by the same determinants except for relative input costs.

A cross-country non parametric estimation of the returns to factors of production and the elasticity of scale

This paper employs local regression to estimate the output elasticity with respect to labor, human capital, physical capital and the elasticity of scale for 90 countries in 1985 and 1995. The results support the hypotheses of constant returns to scale to factors and decreasing returns to accumulable factors. The low capital-labor ratio countries have important differences in factor elasticities in relation to other countries. The augmentation of the production function by human capital did not reduce the elasticity of physical capital as suggested by Mankiw, Romer and Weil (1992). Moreover, it is investigated if the factors shares are really equal to their output elasticity. The wage share raises with the capital labor ratio and the sum of the output elasticity of labor and human capital is below the wage share for high capital labor ratio countries, happening the inverse for low capital labor ratio countries. It indicates the presence of externalities, or imperfect competition or that the marginal theory of distribution is inaccurate.

Comment on “Labor Mobility and East Asian Integration”

Chia (2006) covers a full range of issues related to the international labor mobility (ILM) that is taking place in East Asia. The paper successfully reminds us that this phenomenon carries a history, and that it is activated by both classic and emerging factors. Chia introduces some approaches for orderly ILM that are being taken by various levels of international and regional institutions. The World Trade Organization, Asia–Pacific Economic Cooperation, and many regional trading arrangements (RTAs) have some clauses on ILM in agreements they have concluded, although most of them touch upon only cross-border flows of professional and skilled workers. Chia spells out various types of measures to further regional ILM and succeeds in identifying the capability of regional cooperation frameworks to affect the direction and magnitude of ILM in East Asia. The effectiveness of regional cooperation frameworks in affecting semiskilled ILM is pronounced in the case of the draft versions of Japan's RTAs with the Philippines and Thailand. The latest drafts of the two agreements incorporate the “movement of natural persons” as a “major element,” and address not only professional and skilled workers, but also semiskilled workers. The draft agreement with the Philippines refers to nurses and certified care workers, whereas the draft with Thailand touches upon Thai cooks and care workers. This policy change is truly remarkable in the sense that previously Japan had not shown any interest in the introduction of foreign semiskilled workers. It seems that the package deal approach of an RTA helps such a drastic policy change be realized, although Japan has not yet concluded bilateral agreements on the introduction of foreign unskilled or semiskilled workers with any countries. However, once the “movement of natural persons” is juxtaposed with other fundamental issues in an RTA, the costs and benefits accrued from all the issues appear to be smoothed out. The introduction of semiskilled workers to Japan might become more acceptable to the Japanese when the benefits accruing from liberalization in other issues in the RTA are taken into account. In this way, the framework of regional cooperation is surely facilitating ILM of not only professional and skilled workers, but also semiskilled workers into Japan. Another focal issue raised by Chia is the linkage between ILM and investment. Chia cites Tsai and Tsay (2004) and argues that there are a series of stages of development with different combinations of flows in ILM and foreign direct investment as shown in the first two columns of Table 1. Tsai and Tsay (2004) found that there is a tendency of low-income countries to import capital and to export labor, and that as per capita income increases, this tendency becomes less pronounced. Finally, when a country becomes richer, the country is more likely to export capital and to import labor. Chia interprets this evolution of combination of flows in ILM and foreign direct investment from the view point of the substitutable and/or complementary natures of labor and capital. Here, I propose an alternative interpretation. Assume a model with one product, two factors (labor and capital), and many countries where per capita income is positively correlated with the capital–labor ratio. Thus, a high-income country exhibits a high capital–labor ratio. In addition, assume the product is freely traded internationally, and international markets for labor (L) and capital (K) are completely liberalized. Consequently, the relative factor price will be equalized, and so is the capital–labor ratio (K/L). Without loss of generality, assume that the equilibrium capital–labor ratio is close to that of the middle income countries (K/L)M. Then, in the transition toward the equilibrium capital–labor ratio, the ratio of a high-income country declines whereas that of a low-income country rises. As a result, the pattern of factor movements along with economic development in Table 1 is reproduced. In other words, the pattern of factor movements might be a process of mean convergence in capital–labor ratios.

Endogenous fertility and growth in a model with old age support

This paper examines the interrelationship between capital accumulation, fertility, and growth by introducing an endogenous fertility decision into Diamond's (1965) neoclassical growth model. Under the assumptions that children provide old age support and that individuals incur a variable time cost of raising children, it investigates the potential for cyclical fluctuations in the capital-labor ratio and fertility, as well as for development trap phenomena to be observed. It is shown that when capital and labor are highly substitutable in production, there is a unique steady state equilibrium, and either damped or undamped oscillations in fertility and the capital-labor ratio may occur. However, when the elasticity of substitution between capital and labor is less than one, two steady state equilibria may exist; one with a high capital-labor ratio and a high rate of population growth, and the other with a lower capital-labor ratio as well as a lower population growth rate. The former is a saddle, while the latter may be either a source or a sink. In the latter case development traps are possible.

Technology Expenditures, Factor Intensity, and Efficiency in Indian Manufacturing

The effects of expenditure on R&D and purchase of technology on costs in Indian manufacturing is investigated using firm-level data. Expenditures for R&D, royalties, and technical fees are treated as potentially inducing both Hicks-neutral efficiency shifts and substitution between capital and labor in an indirect cos t function framework. The effects of technology expenditure are found to vary by industry, by type of expenditure, and by domestic or foreign origin of seller. Technology expenditures associated with higher levels of Hicks-neutral efficiency are generally also associated wit h higher capital-labor ratios. Copyright 1992 by MIT Press.