The Labour Input Response to Permanent Changes in Output: An Errors-in-Variables Analysis Based on Panel Data.

Using panel data for Norwegian manufacturing, we revisit 'the increasing returns to scale puzzle' for labour inputs. We consider the response of the input of white-collar workers, blue-collar workers, and blue-collar worker hours to permanent changes in output. Permanent and temporary changes in output are treated as latent variables. We compare OLS, IV, and GMM estimates of the response elasticities and conclude that the distinction between permanent and temporary changes is essential. Our GMM estimates suggest that the 'increasing returns to scale puzzle' remains for all measures of the labour input also when we consider their response to permanent changes in output. For materials, the output response indicates approximately constant returns to scale. This suggests nonhomotheticity of the production technology. Copyright 1999 by The editors of the Scandinavian Journal of Economics.