Profits, R&D and Labour: Breaking the Law of Diminishing Returns to Labour

Institute of Prospective Technological Studies (IPTS), Joint Research Centre Working Paper on Corporate R&D and Innovation No. 10/2015

24 Pages Posted: 17 Dec 2015

See all articles by Sara Amoroso

Sara Amoroso

European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS)

Date Written: December 15, 2015

Abstract

A basic assumption in the economic literature is the one of diminishing marginal returns to labour. However, theoretical studies on knowledge and labour specialization assume that an increase in the knowledge investment embodied in the human capital of workers raises the marginal product of labour. In this paper, we propose a structural approach to test the hypothesis of non-diminishing returns to labour for a panel data set of R&D investing companies, and we explore how the marginal returns to labour vary with their level of knowledge capital (R&D) intensity. Our econometric analysis provides a number of results. First, we find that more knowledge intensive firms have non-diminishing returns to labour, while less knowledge intensive companies exhibit diminishing returns. Second, independently from the knowledge capital intensity, returns to labour increase with size. Relatively smaller firms have diminishing returns, while larger companies have non-diminishing to increasing returns to labour. However, we show that more knowledge intensive firms can attain the threshold of non-diminishing returns faster than their counterparts.

Keywords: size, specialization, profitability, profit function

JEL Classification: J24, L10, L25, O30

Suggested Citation

Amoroso, Sara, Profits, R&D and Labour: Breaking the Law of Diminishing Returns to Labour (December 15, 2015). Institute of Prospective Technological Studies (IPTS), Joint Research Centre Working Paper on Corporate R&D and Innovation No. 10/2015, Available at SSRN: https://ssrn.com/abstract=2704080 or http://dx.doi.org/10.2139/ssrn.2704080

Sara Amoroso (Contact Author)

European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS) ( email )

Edificio Expo, C
Inca Garcilaso, s/n
Sevilla, E-41092
Spain
+34 9544 88335 (Phone)

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