Quasi-fixed inputs and long-run equilibrium in production: a cointegration analysis

This paper proposes a cointegration approach to testing the validity long-run equilibrium in production, where capital and labour are taken as quasi-fixed inputs. Previous studies consider only capital as the quasi-fixed input and do not take account of the time series properties of the variables, assuming implicitly that they are stationary. The canonical cointegrating regressions (CCR) procedure is employed to test for cointegration in both the single-equation and the seemingly unrelated regressions framework, and long-run equilibrium conditions are tested. The evidence from US manufacturing reveals that capital and labour are not fully adjusted to their long-run optimal values, casting doubt on the long-run equilibrium hypothesis. Copyright © 2001 John Wiley & Sons, Ltd.