Some countries may have a huge population, but a lower participation ratio, which affects the labor capacity.Having a huge population does not guarantee a large labor input, because the whole population is not economically active and looking for employment – due to inadequate education and training, malnutrition and ill health, a large proportion of the younger population (which will become an asset later) and older population etc.The labor input is the actual hours used from the capacity available. Total labor force is the economically active population (The World Bank, 2015), which multiplied by the participation rate (who is employed or looking for work – for example, discouraged workers who are no longer looking for work and homemakers are not included in the participation rate.) gives the available labor capacity. 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. α and β are the output elasticities of capital and labor, respectively.K = capital input (the real value of all machinery, equipment, and buildings).L = labor input (the total number of person-hours worked in a year).Y = total production (the real value of all goods produced in a year).The relationship was formed from observation of the American Manufacturing Industry but later validated for other industries as well. Douglas of University of Chicago in their 1928 paper “A Theory of Production” (A Theory of Production, 1928). The Production Function was developed by Charles W.
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