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What To Make Of The Kaldor-Verdoorn Law?, Deepankar Basu, Manya Budhiraja
What To Make Of The Kaldor-Verdoorn Law?, Deepankar Basu, Manya Budhiraja
Economics Department Working Paper Series
The Kaldor-Verdoorn law refers to a positive but less than one-for-one relationship between the growth rates of output and labor productivity, with causality running from the former to the latter. Empirical research has affirmed such a relationship and have found that the Kaldor-Verdoorn coefficient lies between 0 and 1. But the interpretation of this finding remains unclear. In this paper, we present a model to derive the Kaldor-Verdoorn law. Our results show that the Kaldor-Verdoorn coefficient is jointly determined by the elasticity of factor substitution, labor supply elasticity, the profit share and the increasing returns to scale (or demand-induced technical …