Observation of Factor-price Ratio, Capital-labor Ratio and Capital Formation

Author Name SANO Tomoki (Consulting Fellow, RIETI)
Creation Date/NO. May 2022 22-P-012
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This study analyzes how factor-price ratio and capital-labor ratio of production in Japan and the United States have transitioned over time. In theory, an efficient producer would minimize the cost associated with a defined output amount by deciding whether to employ capital or labor based on their price ratio. This study verifies whether this theory explains the employment of capital and labor in Japan through 1990-2019 and the United States through 2000-2019 using empirical data for these two countries. We find that, as derived from theory, the relative decline in capital price and the increase in capital ratio is observed in Japan in the 1990s and the US in the 2000s, but this trend recedes after these periods in both countries. This result implies that the premises supporting the theory may not apply, and concludes by indicating possible causes, such as declining expectation towards growth, increasing labor flexibility and capital irreversibility, and labor-augmenting technological progress.