Labor input depends on labor force, labor force participation rate and employment. For example, in the year 2009, output elasticity of labor in China was 0.4 compared to the USA’s 0.7, and the EU’s 0.6 (Zheng, Hu, & Bigsten, 2009/July/August). It makes the output less dependent on labor and more dependent on capital. For example, developing countries have lots of labor, but the capital is sparse. The output elasticity of labor shows the labors share in the output and it depends on scarcity of labor. I am going to structure this essay in two parts – in the first part I will discuss about individual factors and in the second part, I will discuss about the applications of the model can be used and the limitations of the model.ġ.1. α + β = 1 assuming a perfect competition. These values are constants determined by available technology. These values define the relative change of output for small changes in both inputs.
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