The labour input response to permanent changes in output: An errors-in-variables analysis based on panel data

Using panel data for Norwegian manufacturing, we revisit 'the increasing re turns to scale puzzle' for labour inputs. We consider the response of the i nput of white-collar workers, blue-collar workers, and blue-collar worker h ours to permanent changes in output. Permanent and temporary changes in out put are treated as latent variables. We compare OLS, TC: and GMM estimates of the response elasticities and conclude that the distinction between perm anent and temporary changes is essential. Our GMM estimates suggest that th e 'increasing returns to scale puzzle' remains for all measures of the labo ur input also when we consider their response to permanent changes in outpu t. For materials, the output response indicates approximately constant retu rns to scale. This suggests non-homotheticity of the production technology. JEL classification: C23; J23.