Is There Any Linkage between Sectoral Capital-labour Ratios, Total Factor Productivity, and Wages?

Rath, Badri Narayan and Jangam, Bhushan Praveen (2020) Is There Any Linkage between Sectoral Capital-labour Ratios, Total Factor Productivity, and Wages? Emerging Markets Finance and Trade, 56 (15). pp. 3662-3677. ISSN 1540-496X

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Abstract

This paper investigates the relationship between sectoral capital-labor ratios, total factor productivity (TFP) and wages based on the contemporary Balassa-Samuelson model. To proceed, first, we identify a tradable and nontradable sector using an average of export to value added ratio for a group of developed and developing countries over the period 2001 to 2014. After accounting for cross-sectional dependence in the data, we find strong evidence that TFP of the tradable sector and wages significantly determines sectoral capital-labor ratios in both developed and developing countries. The long-run elasticities show that improvement in TFP declines the capital-labor ratios, whereas wages increase the capital-labor ratios in both tradable and nontradable sectors across developed and developing countries.

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