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.
Attila Gaspar (Fri,) studied this question.