Estimating the Lagged Response of Profitability on Labour Ratio

Abstract

This paper investigates recent trends of production factor – including both capital and labour – ratios in the EU-27 based on national accounts data. These output elasticities are typically expected to be constant, however, both theoretically and empirically, these assumptions are frequently violated for a variety of reasons.

In this paper a lagged response is introduced and investigated: changes of profitability can affect labour force adjustments with a delay. Granger causality tests confirm lagged behaviour. Structural VAR estimations show the strongest impact over the span of two to five quarters and the effect is moderate.

Keywords:

• Global Vector Autoregressive Model,
• impulse response functions (IRF),
• Granger causality,
• Labour Ratio,
• Capital Ratio,
• Macroeconometrics,
• VAR